Business Law 2

Business Law Oda Bultum University school of law.
INTRODUCTION
“Business law” refers to the whole regulatory environment in which individuals or
‘organizations’ engage regularly for the purpose of securing commercial returns. It is a legal
regime with the object of shaping the behavior of “actors” in business transactions. There is a
vested interest for the law, like any other human relationships it claims to regulate, to step into the
work-for-profit areas in order to ensure that commercial interactions are conducted in a proper
manner. The legal regulation of business is even more sensitive because engagement in business
is an extension of a constitutional right to property so that there must be a mechanism of the law
that enables individuals to be shielded against unwelcoming practices that prejudice their right
without of course affecting the rights of others. The law of commerce is indispensable not only
from the view point of individual right to property but also because it constitutes a fundamental
economic unit of a nation’s economic performance and status as a whole. In this sense, business
law makes a huge contribution to the strong economic wellbeing of a state and to the
accompanying betterment of society’s economic position. The legal framework that governs
business activities prescribes the conduct required of business-persons in their commercial life,
and solves business disputes in the ultimate aim of keeping the tranquility of the business
environment.
The Ethiopian “law of business” would also have as its object the advancement of the above
interests. This module centers upon the Ethiopian law with the fair treatment of the relevant
fundamental principles of law that are generally accepted in the business world. It is particularly
concerned with such visible areas as contracts, agency, sales, commercial instruments and
insurance among other things. These areas substantially impinge upon economic sphere of
interactions and, therefore, important for business people and other actors.
The course is designed to equip students with fundamental legal tools when deal with business
matters. You would be enabled to overcome various business challenges involving legal
questions in your future professional careers. It is hoped that you are already well aware of
general business ideals. Therefore, it suffices that you possess basic knowledge in economic and
business principles. You are going to be briefly introduced about the law in this module.
The structure of the module is such that first considerations about law in general are made. Then
follows the exploration of the legal regime whereby legal transactions emerge, the law of
personality. The law of contracts, a relatively wider and indispensable area for you as a
businessperson, comes next. Special types of contracts, agency and sale, are also separately
treated because of their fundamental importance to the business world and will appear in the
module in that order. Principles of modern commercial law, as contained in the 1960 Commercial
Code of Ethiopia would mark the completion of this peace of writing. Traders and business
organizations, insurance and negotiable instruments are addressed under this part. The module
contains a number of self-check and summary questions at the end of each chapter. You are
strongly advised to attempt all those questions and check your understanding of the matters
covered in this module. Well come to business law. I wish you good study.
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CHAPTER ONE
INTRODUCTION TO LAW AND THE LEGAL ENVIRONMENT OF BUSINESS
The successful completion and study of this chapter is expected to be accompanied by the
attainment of the following objectives:
- Distinguishing between/among the various schools of juridical thought that evidence
the absence of a generally agreeable definition of the word “law”;
- Noticing that law is more understood in terms of its features and functions rather than
interims of what it is;
- Specifically internalizing the functions law performs in a society and those of

business law in particular;
- Identifying the important legal matters in business interactions,
- Analyzing the pros and cons of resolving disputes in business by courts versus
alternative dispute resolution techniques.
1.1. Meaning of Law and Schools of Jurisprudential Thought

There have been and will continue to be different definitions of law. Various renowned scholars
and jurists have so far been making their own assertions of what law is, and almost none of them
concur on the definition of law. The Greek philosopher Aristotle for instance thought of law as a
“pledge that citizens of a state will do justice to one another”. Aristotle’s student, Plato, asserted
that law was a form of social control. Cicero, a Roman philosopher, believed law was the
agreement of reason and nature, the distinction between the just and the unjust. The British legal
scholar Sir William Blackstone described law as “a rule of civil conduct prescribed by the
supreme power in a state, commanding what is right and prohibiting what is wrong”. The famous
US Supreme Court Justice Oliver Wendell Holmes on his part contended that law was a set of
rules that allowed one to predict how a court would resolve a particular dispute – “the prophesies
of what the courts will do in fact and nothing more pretentious …”. One can easily notice that all
these attempts of defining law are based on varied particularities, even though a general
observation may be inferred concerning the nature of law, which will be discussed in brief very
shortly. In jurisprudence, or the study of law, the broad statement concerning the nature of law is
the point of departure for all legal scholars and philosophers. Now we come to the discussion of
the most influential schools of thought that have embodied the contentions in the discourse of
defining law. Legal philosophers and scholars frequently disagree on what the proper function of
law should be and their disagreements have produced different schools of jurisprudence, or
philosophies of law.
a) The Natural Law School

This is the oldest and one of the most significant schools of jurisprudence. The
proponents of the natural law school of jurisprudential thought assert that “government
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and the legal system should reflect universal moral and ethical principals that are inherent
in human nature”.
While according to natural law theorists there can exist a positive, or conventional, or
state-made, law which is operative only within the political jurisdiction of the concerned
state, such law would be valid only if it accords with natural law, which takes higher
order and which is neither spatial nor temporal. This means that natural law is universal;
it transcends any particular country’s written laws (or positive laws) and that it is not time
and space specific. In short, the natural law tradition presupposes that the legitimacy of
conventional, or positive, law derives from national law; and whenever it conflicts with
natural law, conventional law loses its legitimacy and should be changed.
The world had experienced the practical application of natural law in the resolution of
real cases in the past World War II period. The Nuremberg trial of Nazi war criminals for
“Crimes Against Humanity” at the end of the WW II was conducted by making appeal to
this higher law. Although these criminals may not have disobeyed any positive law of
their country and may have been merely following their government’s orders, they were
deemed to have violated a natural law that transcends any law imposed by state. The
natural law school of thought encourages individuals to disobey positive or written, laws
if those individuals believe that the written laws are in conflict with natural law.
Accordingly, persons who felt that America’s involvement in Vietnam during 1960’s and
early 70’s was wrong used natural law as their reason to violate written laws when they
protested America’s war effort.
b) The Positivist School

At the other end of the spectrum is the positivist school, and those who adhere to this
school believe that there can be no higher law than a nation’s positive law. This means
that significance and final validity would be placed in law created by a particular society
at a particular point in time.
In the positivist perspective, the law is the law and must be obeyed irrespective of its
content. The merits and demerits of a particular law can be discussed and laws can be
changed in an orderly manner through a legitimate law making process. But as long as a
law exists, it must be obeyed; and whether a given law is good or bad is irrelevant in so
far as it has assumed its status following a duly constituted procedure.
c) Legal Realism
This school is propounded by thinkers who were rebelling against some of the common
assumptions regarding law of the contemporary legal theorists and jurists. The discourse
of the legal realists principally contained three-fold aspects. Firstly, they were opposed to
the assumption that judges, at least ideally, apply the law impartially, logically and
uniformly. The legal realists rather firmly believed that each judge is influenced by the
beliefs and attitudes unique to his/her personality. Second, they claimed that each case is
attended by a unique set of circumstances and that no two cases, no matter how similar,
are ever exactly the same. Therefore, according to the realists, judges should tailor their
decisions to take account of the specific circumstances of each case rather than rely on
some abstract rule that may not relate to those particular circumstances. Thirdly, the
advocates of legal realism constructively influenced legal thought in that they called on
judges to consider extralegal factors, such as economic and sociological data, in making
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decisions, to the extent that such non-legal sources illuminate the circumstances and
issues involved in specific cases. In general, the tenet of legal realism is the call for
flexible application of laws in a manner that conforms to the constant change in societal
values and the recognition of judicial activism.
d) The Marxist Legal Thinking
The Marxian view of law is considerably associated with its politico-economic paradigm.
This conception of law is substantially different from other schools of thought in that it
questions the very origin and purpose of law and argued for its elimination.
According to the Marxists, law came into existence as a result of the emergence of a class
society based on private property. The formation of a class society is such that those who
have appropriated private property constituted one class and those with no private
property constituted the other class (the lower class), and law is an instrument of
maintaining class differences and an oppressive tool by the economically dominant
against the have-nots.
The political and economic object of the Marxist thought is the transformation through
socialist state of the society to communist society where classes do not exist (and where
private ownership of means of production dies out). If the society is transformed to
communist mode, there would be no more need of laws and state. While the Marxists
regarded law, just like positivists and realists, as state-made, they contended that such law
would have effect only until communism is realized and would wither away thereafter
along with the state.
The lines of legal thought we have just explored above reflect the existence of diversified notions
regarding the definition of law. The variations in ascribing a meaning to law are not matters of
mere semantics; they are critical and rather grounded on deep philosophical foundations.
Nevertheless, the various schools of jurisprudential thought have had drawbacks that has
subjected than to critics. The major problem with these schools of thought generally is that no
comprehensive approach to define law is made. None of the perspectives would attempt to look
into law in its entirety; they are rather concerned with specific aspects of law. Naturalists, for
instance, limit themselves to the consideration of content of the law. Positivists, on the other
hand, prefer to treat law from formal point of view that law assumes validity if it comes about by
a legitimate process.
Another problem coming up with an all convincing definition of law pertains to its very nature.
Law is a dynamic social norm. The society as a whole (whether ideologically, philosophically,
culturally, socially, economically, or politically) keeps changing and law, as a norm of social
regulation, accordingly would be subjected to a constant state of flux. The law cannot refuse to
change while the matters it governs change. If it does refuse, it would no more be legitimate and
would be thrown to disuse. Changing societal circumstances demand the continued modification
of law in terms of its content, form, scope and nature. Therefore, providing a consensual
definition of law in terms of these latter factors is virtually impossible because these yardsticks
would considerably differ from time to time, and it is partly no surprise that the various jurists
have not concurred on what law is.
All the above failures do not mean, however, that law is without any generally accepted
characteristics. The problems reveal the apparent difficulty in telling what law directly is, but law
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can be regarded as possessing certain universally recognized features. These features or attributes
are very important in that they provide indirect descriptions of law. Below are the base
characteristics of law along with their brief explanation.
1.2. The Features of Law

i) Generality
The most obvious feature of law is its generality. Law is a general statement regarding a possible
human conduct. Any valid legal norm is applicable to all the subjects in the author’s territory.
Law is not meant to shape the behavior of a certain category of persons and leave others; every
one is subject to the application of any duty existed law, saving extremely exceptional
circumstances (such as exemption from legal liability to a certain degree because of immunity
provisions). For instance, laws passed by the Ethiopian legislator (the House of Peoples
Representatives) demands all Ethiopians to comply with it, irrespective of race, language,
religion, social status, sex and political outlook. The generality of laws also implies that a law is
applicable to all similar cases, and it does not leave others and govern some.
ii) Normativity
One of the distinctive features of law is that it is a normative statement. This accords with the
philosophical discourse on the dichotomy between the “is” and the “ought”. The characterization
of law as a normative statement refers to the “ought” aspect of the discourse, the statement of
what should be rather than what is. Law is not a factual statement (description is not in the nature
of law); it is rather a prescriptive tool which purports to shape human behavior in the future.
iii) Establishment in Permanence

The coming into force of law presupposes, at least presumably, its indefinite existence in the
future. It is unusual to fix a time-limit for the application of law. A frequently changing law
creates social instability and more prone to losing legitimacy. This does not mean, however, that
laws live forever. They have to be reasonably flexible to accommodate changing social realities.
Change in societal circumstances is normally a gradual process and the corollary gradual
remolding of laws cannot be regarded as resulting in an unstable phenomenon. Laws violate the
virtue of permanence and create instability when they change quickly and unnecessarily without
having regard to the status of the situation it is meant to govern.
Law might exist exceptionally for temporary application. The possibility of the declaration of sate
of emergency explains such a circumstance. The law declaring the emergency situation remains
in force until the matter that called for the declaration of emergency secedes. But overall, law is
to be established in permanence and a time frame would be fixed only in exceptional
circumstances.
iv) Intimacy with Human Behavior and State

Law is a social norm and its ultimate concern is regulation of the social behavior of human
beings. The claim of law would naturally be made by men with respect to or as against each
other. Law cannot be employed to govern relationships of other animate or inanimate things as
among themselves; it is not concerned with a claim between humans and other things either.
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The intimacy of the law and the state is far from question. In reality, one cannot conceive of one
without the other (they are two inseparable aspects of the same system). One cannot have validity
or legitimacy without the other. Indeed, the state is itself brought into life by law and cannot
continue in that status without using law. The law on the other hand would have life and produce
the desired effects only by the backing of centrally organized state machinery.
v) Strongly Institutionalized
We have said above that law is backed by an established system of a state. The state is known for
its strong institutionalization and this provides the law with institutionalized system of
enforcement. The state is constituted by centrally established institutions of legislature, executive
and judiciary entrusted with the tasks of law making, law enforcement and interpretation of laws
respectively. The combined operation of these organs sanctions the law by a strong force.
1.3. Law as Distinguished from Other Social Norms

Law is a social norm, but not the only one. There are also other values of normative significance
in a society. The features we have seen in the forgoing sub-topic generally characterize law as a
social norm. Some of these features are exclusively concerned with law while some are shared by
other social norms. Now we came to the questions: what are these other social norms? And what
makes law different from them?
This “other social norms” category is filled perhaps by ethics, morality, culture, religion, and the
like. These ethical, moral, or religious values are normative in the sense that they, just like law,
prescribe what should be and what should not be and accordingly shape the social behavior of
man. To this extent, law possesses an identical attribute to that of ethics, morality or religion.
Nevertheless, there are conspicuous differences between law and other social norms, as provided
below.
One important issue that differentiates law from the other social norms is mechanism of their
enforcement. Law is backed by a strong sanction of the state and would be institutionally
enforced. Ethical/moral/religious norms on the other hand lack such external and effective
enforcement mechanism. Their observance is more often than not demanded in point of
conscience than through external organ. Individuals can breach these norms with impunity and
the most they would suffer is moral guilt.
Second, scope of application is a distinguishing mark between law and the “other social norm”
category. Law enjoys uniform and nationwide application. But the other social norms are peculiar
to particular groups and therefore suffer from extremely localized (restricted) application. There
could be a number of religions, cultures or customary practices in a state; none of them would
have norms that apply beyond their own peculiarities.
Law can still be identified vis-à-vis other normative values of the society on the basis of the
mechanism by which it is created and changed. Law originates from a centrally established and
clearly defined institutional framework. The existence of clear institutionalized system would
make it easy to bring law into effect and to amend it. Non-legal norms, on the other hand, do not
normally have an easily traceable institutional origin for they are not made in an organized way.
They come into existence through a practice by a concerned group over a relatively longer time in
a scattered and uncentralized manner. The development of these non-legal norms out of unclear
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and gradual process makes it equally difficult to amend them. They are not amenable to easy and
fast amendment for they are rigidly established.
A further important factor that can be regarded as a virtue of law over non-legal norms is the
exhaustiveness and clarity embedded in law. Law would be exhaustively proclaimed (mostly
written) and sufficiently clear. The conduct it purports to command or prohibit and the
consequences of behaving otherwise would be fixed in advance. Normative rules of ethics,
morality, or religion are, on the other hand, barely exhaustive and known for their manifest lack
of clarity. And mostly non-legal norms do not determine consequences of breach in advance.
Since they are mostly unwritten, they are surrounded by a cloud of vagueness and obscurity.
1.4. Functions of Law
Dear students, have you ever doubted the importance of law in a society? Do you think that the
secure condition in which you accomplish your tasks would be there had law not been there and
prevailed? I hope you say not! Yes, laws perform various functions in a society. They are the
powerful weapons to attain diversified societal needs. Laws are not ends in themselves, but rather
they are the most effective and reliable means at the disposal of the society.
The simple and common sense response you might make is perhaps that law is an instrumentality
for maintaining order and security. Imagine what would happened if there were no law to curtail
the conduct of gang of robbers breaking into your abode and taking away the property you have
gained over time through exerting your energy and investing your money. Think also of a
reckless conduct that sets fire to a building in which you run your business affairs which results in
a looting of essential documents. I hope you openly unwelcome such a situation. In the absence of
law, persons might excessively and arbitrarily behave and you would also be discouraged to
undertake proper business activities for fear of the risk of losing it some day. So, laws, especially
criminal laws, would become indispensable tools to stop unwelcoming conducts and to create
peace and stability for proper life of the society.
It is important to note that haw delves into almost every social interaction. It regulates the way a
particular relationship is to be created, maintained and broken. Law is not limited to mere
maintenance of peace and order; it also steps in to govern detailed individual interactions. Laws
of family for instance are concerned with the regulation of the institution of marriage and
matrimonial affairs. Contract and property laws administer contractual bonds and property
relationships of individuals respectively. Business laws, on the other hand, intend to shape
behavior in commercial transactions and ensure the interaction is conducted in healthy and
effective manner.
Law protects citizens from arbitrary and excessive governmental actions. That body of law which
sets out structure of the state and the relationship the government of that state would have with
citizens is referred to as constitutional law. The powers and functions of the government are
usually defined by a constitution, and this law restrains undue governmental encroachment in the
affairs of subjects. Human rights provisions are typical examples in this regard – that they call
upon the government to either act or refrain from acting in the protection and enforcement of
human rights. Law of constitution can function in such a way that the various organs constituting
the government discharge their tasks in an atmosphere of harmony and transparency. The
principle of checks and balances incorporated into most republican constitutions reveals the
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possibility of review of actions or decisions of the legislative, executive or judicial bodies by one
another.
Laws are also instrumental in fighting harmful traditional practices (HTPS). Early marriage has
been the widespread practice in many parts of Ethiopia. Marriage is a big affair upon which
family, the fundamental unit of the society, is found. Yet, such purpose is served only if spouses
are psychologically and biologically developed enough. Ignorant of such fact, most Ethiopian
parents force their teenage children (especially girls) to marry while they are in fragile mental and
physical conditions, exposing them to various economic, social and biological problems. The
same is true of Female Genital Mutilation (FGM). The law is a typical tool in reducing, and
ultimately eradicating, these harmful traditional practices.
Law also pays a prominent role in improving the life of the society through the encouragement of
innovation and creativity. Law encourages individuals to engage in innovative tasks by granting
them rights to exclusive enjoyment of their inventions via issuing patents, copyrights, trademarks
and the like. These mechanisms bestow inventors and authors of new ideas with economic and
moral benefits, thereby helping society to make use if better means of life.
1.5. Classifications of Laws and Nature of Business Law
The body of law is huge. To study it one must break it down by means of classification.
Classification of laws is the systematization of the law based on the subject matter for the purpose
of finding the relevant law more easily and determining whether different legal rules were
required depending on their area of application.
No single classification system can cover the large of mass of legal information. Consequently,
those systems that have been devised tend to overlap. Moreover, they are, of necessity, arbitrary
in some respects. A discussion of the best known classifications of law follows.
Public versus Private Law
Public law addresses the relationship between persons and their government, and between various
governments. They are public in the sense that the interest of the public at large is at stake as
represented by the government. Criminal law and constitutional law, for example, are generally
classified as public law, because they deal with persons and their relationships to government.
Criminal acts, though they may involve only one victim, are seen as offenses against the society
as a whole and prohibited by governments for the purposes of protecting the public.
Constitutional law is a public law because it involves question of whether the government
(federal, state or local in a federal setting, or the central government in a unitary system) has the
power to act in a particular fashion. Often the issue is whether a law or a decision of a
governmental authority, duly passed and made, exceeds the limits set on the government.
Private law governs direct dealings between persons. When persons deal or affect other persons,
such as in a contractual relationship, the law governing these relationships is classified as private
law. Private law may ultimately advance societal interests as a whole, but its immediate concern
is with individual transactions that affect the legal positions of the transacting persons. Agency,
law of commercial paper, trade and business organizations, sales, torts, insurance and any other
area of business law is essentially classified as private law
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Substantive and Procedural Law
Substantive law includes all laws that define, describe, regulate and create legal rights and
obligations. This body of law establishes acts and situations producing effect at law. For instance,
a rule stating that promises are enforced only when each party has received something of value
from the other party is part of substantive law. So, too, is a rule stating that a person who has
injured another through negligence must pay damages. Most of the bodies of law we have
highlighted above, both public and private, are substantive laws. Substantive law tells us what our
rights are.
Procedural law sets out the methods of enforcing the rights established by substantive law.
Questions about how a lawsuit should begin, what documents need to be filed, which court will
hear the suit, which witnesses can be called, how the judicial proceedings is conducted, and so on
are all questions of procedural law. In brief procedural law tells us how to exercise substantive
heights. Civil procedure, criminal procedure and evidence are typical examples.
Dear students, you have to bear in mind that the importance of the distinction between substantive
and procedural law is more than academic. This is so because the result of a case may well
depend upon the determination that the rule is substantive rather than procedural.
Civil versus Criminal Law
Civil law is concerned with the duties that exist between persons or between citizens and their
government (the latter as a ordinary legal person), excluding the duty not to commit crimes.
Contract law, for example, is part of civil law. The whole body of tort law, which has to do with
the infringement, in the absence of contract, by the person of the legally recognized rights of
another is an area of civil law. Criminal law, in contrast to civil law, is concerned with wrongs
committed against the public as a whole. Criminal law is always public where as civil law is
sometimes public and sometimes private. In a criminal case, the government seeks to impose a
penalty on an allegedly guilty person.
Dear distance friend, I hope you have understood the nature and purpose of the above
classification attempts. I would like you to have thorough look to the classification once again
and identify the position of our subject matter, business law. You see that the various areas of law
that greatly touch with business (such as contracts, partnerships, commercial instruments, traders
and business organizations, agency, sales and insurance) constitute the private legal regime rather
than public, substantive rather than procedural, and civil rather than criminal.
1.6. Out-of-Court Settlement and its Virtues in Business
Traditionally, every dispute involving legal questions, civil or criminal, has been determined
formally by the regular law courts. Nowadays, however, this trend is a bit changing, for variety
reasons, in favor of what we call alterative dispute resolution (ADR) for civil cases. ADR
techniques provide a viable and preferable alternative, as its naming can tell, to court proceedings
in the swift disposition of legal matters.
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Business-persons prefer one or the other of the two dispute disposition alternatives for a couple of
reasons. In particular, they indulge themselves in using out-of-court settlement mechanism
because of certain virtues. Court settlement is conducted in an extremely formalistic manner and
is surrounded by legal/procedural technicalities. Entrepreneurs would choose simple means of
dispute disposition and such is effectively provided by ADR. Secondly, adjudication by courts
entails greater cost litigation and consumes time and energy because the number of court cases
filling the dockets (court schedules listing the cases to be tried) grows every year and continues to
grow. Such a backlog of court cases awaiting trial and subsequently accompanied by delayed
resolution is very unwelcoming to business world that deals in the fast-paced commercial
transactions. Third, a final judicial disposition of a legal dispute is usually accompanied by a
winning and losing spirit. Court settlement is solely driven by letters of the law and never admits
give and take circumstances. So, ultimately a judgment that satisfies one of the litigants and that
disappoints the other is rendered. This in turn will create an adverse relationship between the
disputants and potential beneficial relationship between these very disputants would be
jeopardized. Out of court settlement, on the other hand, is based on the concept of reciprocity
(give and take) so that both litigants would go home satisfied and future relationship is possible.
So, out-of court settlement is non-adversarial in nature. Methods of ADR range from neighbors
sitting down over a cup of coffee to work out their differences to huge multinational corporations
agreeing to resolve a dispute through a formal hearing before a panel of experts. In what follows,
we look at the numerous methods used for settling disputes outside the court system.
1.6.1. Negotiation, Conciliation and Mediation
Negotiation, mediation and conciliation possess certain important common characteristics when
seen vis-à-vis arbitration. These are all forms of ADR that are non-adversarial in nature. In other
words, the primary goal in these procedures is not to determine which side is more at fault or
which side should win or lose but to search for common grounds of agreement. Still, each has its
own features that distinguish it from the other. Let us see them one by one in brief.
i) Negotiation
In this process, the parties come together informally, with or without attorneys to represent them.
In such an informal setting, the parties air their differences and try to reach a settlement or
resolution without the involvement of independent third parties. Because no third parties are
involved and because of the informal set-up, negotiation provides the simplest and swift
opportunity of dispute disposition outside the court structure. It has to be noted here that the
presence of an attorney to represent one or both of the parties dose not in any way imply the
involvement of an independent third party. Attorneys, if any at all, get involved in the dispute by
representative capacity stepping into the foot and taking the place of the party they represent and
hence they are regarded as parties to the dispute. Even if a lawsuit has been initiated, the parties
may continue to negotiate their differences at any time during the ligation process and settle their
dispute.
ii) Conciliation
Conciliation is a mechanism of dispute resolution in a friendly and unantagonistic manner in

which a third party, the conciliator, assists the parties to a dispute in reconciling their differences.
Conciliation is often employed when disputants refuse to face each other in direct negotiations;
accordingly, the conciliator plays a facilitatory role in that he/she helps to schedule negotiating
forums and carries offers forth and back between the parties. Technically, conciliators are not to
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recommend solutions; practically, however, they often do. But the final decision is taken up the
parties themselves.
iii) Mediation
In this process too, it is the parties who must reach a final agreement but being assisted by the
influential role of an independent third party, the mediator. The procedure of mediation allows the
mediator to propose solutions for the parties to consider. The parties may select the mediator on
the basis of the person’s reputation for fairness and impartiality. The mediator may by a volunteer
from the community and need not be a lawyer. Usually, a mediator will charge a fee for his or her
services (which can be split between the parties).
In mediation, the mediator talks face to face with the parties and allows them to discuss their
disagreement in an informal atmosphere. There are a few procedural rules established flexibly by
the mediator and/or the parties for the proper conduct of the mediation proceedings. The absence
of legal procedures and the unattractiveness of the service fee discourage lawyers from
participating in most mediation programs and thus legal terminology is frequently avoi
1.6.2. Arbitration
Arbitration is a bit more formal and court-like method of ADR. The peculiar feature of arbitration
is that a third party hearing the dispute decides the issue. Unlike in the above three cases where
the parties themselves settle their dispute although a third party may assist them in doing so.
Depending on the circumstances and parties’ wishes, the decision rendered by an arbitrator may
be legally binding on the parties, or it may be non-binding. This implies that arbitration
proceedings make use of ordinary laws of the land (Art.3325(1) of the Civ.C) but such use is
compromised with the ultimate end of reaching an amicable solution. The arbitrator may also be
called upon to prove something without deciding the legal questions involved in the dispute
(Art.3325 (2), Civ.C). In arbitration, the arbitrator practically becomes a private judge even
though he/she does not have to be a lawyer. Frequently, arbitration proceedings are conducted by
a panel of experts from different walks of life.
Any commercial matter can be invariably submitted to arbitration. Parties may present their
dispute to arbitration on the following two possibilities. The parties can agree to settle their
differences through arbitration rather than the court system when a dispute arises (Art.3328 (1)).
In the majority of cases, however, disputes are resolved via arbitration because of an arbitration
clause in a contract entered into before the dispute arose (Art.3328 (2)). An arbitration clause
provides that any disputes arising under the contract will be resolved by arbitration.
The arbitration process – The arbitrator may be give the power at the beginning of the arbitration
process to establish rules that will govern the proceedings. Typically, these rules are much less
restrictive than those governing formal litigation. Regardless of who establishes the rules, the
arbitrator will apply them during the course of the hearing. In the typical hearing format, the
parties begin as they would at a trial by presenting opening arguments to the arbitrator and stating
what remedies should or should not be granted. After the opening statements have been made,
evidence is presented. Witnesses may be called and examined by both sides. After all the
evidence has been presented, the parties give their closing arguments. On the completion of
closing arguments, the arbitrator closes the hearing.
11
After each side has had an opportunity to present evidence and to argue its case, the arbitrator will
reach a decision. The final decision of the arbitrator is called an award, even if no money is
conferred on a party as a result of the proceedings.
The role of the court in arbitration proceedings can be noticed at both pre-arbitration and post-
arbitration stages. In pre-arbitration stages, the court may involve to resolve issues of arbitrability
– the determination of whether the dispute can be brought to arbitration, not the consideration of
the dispute on its merits. The court usually settles the matter by compromising public policy and
freedom of contract. At the post-arbitration level, the court would have its hands in the arbitration
for setting aside an arbitral award when that is warranted. The court may nullify or render an
award ineffective when it violates public policy, contravenes public morality, or where similar
public interest is at a stake.
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Self-check Questions
1. Discuss why a consensual definition of law has been difficult and why the various
schools of legal thought diverge on the conception of law.
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
_________________________________________.
2. Identify the basic features of law first, and then outline features that distinguish it from
non-legal norms.
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
_________________________________________.
3. What specific functions does business law perform in the society?

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________.
4. What is the difference between the positivist and the Marxist legal ideology?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
_______________________________________________.
5. Where do you find business law in the broader classification of law? Exhaustively
discuss all the appropriate places it may occupy.
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________.
6. Discuss the virtues of out of court settlement of disputes over court adjudication.
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________.
13
CHAPTER TWO
LAW OF PRESONALITY
This section introduces the basic concept in law – the law of persons. Here is where all legal
claims start and produce the intended legal effects. A student who successfully completes the
study of this part should be able to:
- distinguish the legal meaning of person from its literal meaning;
- explain the purpose of granting an individual or a fictitious being with personality;
- discuss the acquisition and termination of personality;
- identify the attributes of personality;
- analyze capacity and incapacity of physical persons.
2.1. The Concept of Personality and its Effect

The term person in law is different from its conventional meaning. Personality in law refers to the
authority accorded to a being (individual or organization) by law so that the latter would be able
to enter into various transactions having effect at law. In other words, humans and fictitious
entities cannot perform juridical acts without being recognized as persons before the law. In order
to acquire rights and bear duties that are enforceable by the machinery of a legal system, one
needs to possess personality first. It is only beings that are persons in the eyes of the law who can
conduct legally binding transactions. The term person in its ordinary sense refers to human beings
only and not for any legal purposes other than mere linguistic purpose. But for the purposes of the
law, not only individual human beings assume personality upon fulfillment of certain prescribed
conditions, but also artificial creations of the law are granted personality.
Personality is a fundamental concept in law because no dealings of legal significance would

produce effects without it. It answers the basic question who the subjects of the law are. Only
subjects of the law can enjoy the rights that the law confers upon them and only they can
discharge the duties it imposes upon them. Thus, the normal effect of personality is the ability to
be a party to legal transactions and perform various juridical acts (acts having effect at law)
having effect of law.
Personality is granted to two categories of beings and accordingly is of types. One is physical or
natural personality that is possessed by human beings. In the past, not all human beings were
subjects of the law. For instance, slaves were regarded as mere chattels of their masters and did
not have any rights or duties of their own. They were objects of legal transactions rather than
subjects of the law. So, during those times, personality was conferred upon non-slaves. But these
days, with the abolition of slavery and its strict prohibition, virtually all human beings possess
personality and perform juridical acts. The other type of personality is that accorded to beings that
do not have material existence. Associations, companies, organizations, partnerships,
corporations or even the state are only perceived by the law to exist. These fictitious entities are
14
exclusive innovations of the law and accordingly given personality because of the necessities of
modern complex legal transactions.
2. 2. Beginning and Termination of Artificial Personality
There could be numerous mechanisms through which moral persons will begin to have legal life.
Of these mechanisms, the famous ones are issuance of a specific legislation, effecting registration
and requirements of publicity. For instance, public enterprises will start to have personality upon
the enactment of establishment regulations with no other conditions attached to it. On the other
hand, private business organizations need to be registered with a competent public authority in
order to acquire legal personality. They should also comply with publicity requirements. So,
acquisition of personality by business organizations is realized by meeting the requirements of
both registration and publicity, and only as a consequence of such they can validly undertake acts
of civil life.
The same way personality begins will it mostly end. That is to say, just like artificial personality
commences through issuance of statutes or effecting registration and publicity, it ends through the
enactment of dissolving law or the striking out of name of the entity from the public registry. To
terminate the legal personality of a public enterprise, regulations would be issued and these would
serve the purpose of ending the legal life of the enterprise. Ordinary business organizations would
cease to have legal life when they are canceled from the registry and/or through the revocation of
the license issued to them as evidence of personality. Artificial personality may also end as a
matter of fact where the object for which the entity is established becomes impossible to achieve
or where that organization is dissolved because of bankruptcy. In all the above cases, the
fictitious beings would die out and they can no more be parties to transactions having effect at
law. Any act done by these beings after their personality has terminated is deemed never to have
happened for all legal purposes.
2.3. Attributes of Legal Personality
Being recognized as a person by the law makes the person possess certain attributes. The most
noticeable of these attributes are given below.
i) Having a name: - It may be very simple to coin a name and call a certain being by that. But
names do really affect the legal position of a person because they are mechanisms of identifying
the civil identity of a specific person in the society and of legally conferring/imposing upon it
powers and disabilities. Furthermore, since use of a name can modify the legal status of a person,
the law provides for protective mechanisms against abuse and usurpation of the name by others.
Generally, it is through name as a manifestation of civil identity that a person in the eyes of the
law can become a party to a legal transaction, and thus it is a fundamental attribute of personality.
ii) To sue and be sued (in one's name):- To sue is to bring a legal action against another, and,
conversely, to be sued is to face a legal action brought against oneself by another. In both cases,
one attends a law court where rights and duties are often modified through judgments. Because
they involve alteration of one's legal position and determination of liability, suits should be
brought by and against the concerned person in its own name. For instance, if three people (A, B
15
and C) form a company and the latter has satisfied the requirements of law for the acquisition of
personality, it brings legal actions against others in the name of the company and not in the name
of the owners. Similarly, others institute a legal action against the company in the name of the
company and not in the name of A, B, or C (the owners). Thus, a distinction is drawn between the
liability of the company and the individual persons forming it.
iii) Entering into contractual relations: - Since a legal person is an entity that can be a party to
legal transactions, it can enter into various contracts in its own name. A company can conclude a
contract with another company or with a human being, and the rights acquired as well as the
liabilities incurred because of the contract belong to the company itself, and not to the owners. It
is this legal person itself that is either the creditor or the debtor of a third party contractant.
iv) Ownership and administration of property: - A legal person can exercise all property rights to
the exclusion of others and enjoys ownership and administration right over all chattels belonging
to it. Property belonging to a legal person is distinct from the property of its owners, i.e. they
belong to essentially different patrimonies.
v) Obligation to pay taxes: - A legal person is liable to pay taxes on taxable benefits and gains.
Since it is authorized to own and administer property and since it can carry on business, a legal
person pays taxes on its property and income in the same way human beings do.
While it is generally true that fictitious beings possess all the above features on their own behalf,
there are also some other points we need to take note of here. We know that moral or juridical
persons do not have a physical existence, and so they are without the natural faculties of thinking,
deciding or moving. That means they necessarily undertake through human agents when they
carry out the above affairs. They use human mind and decision when they coin the name by
which they are identified; they bring suits and defend same being represented by human beings; it
is again human agents that exercise property ownership and administration, and sign a contract on
the behalf of the legal person. But all such acts performed by the human agent through
representation are deemed to have been directly undertaken by the legal person, and the rights and
duties arising therefrom would bind the legal person and not the human agent. Individuals only
facilitate transactions and they then step-out of the legal consequences.
The conferring of personality upon moral persons and accordingly authorizing them to own
property and conduct business in their own name give rise to the concept of limited liability. The
fact that the property and patrimony of the legal person is distinct from that of its owners means
that the legal person is liable to the extent of its property only. The liability does not extend to the
property/patrimony of the owners.
2.4. Commencement of Physical Personality

Dear students, the personality of natural persons begins through a couple of ways. There is a rule
which is generally regarded as the starting point of personality, and there is also an exception to
such rule where personality commences. Discussion follows below of the rule first and then the
exception.
2.4.1. The Rule
16
Most legal systems accept birth as a time when personality of a human being begins. Similarly,
Art.1 of the Ethiopian Civil Code provides “the human person is the subject of rights from its
birth…”. Birth refers to the complete extrusion of the baby from its mother's womb either in a
natural way or by a medical operation. In this sense, the beginnings of natural and legal existence
are simultaneous. Birth alone is a sufficient condition to confer personality under the Ethiopian
law, and no other requirements are attached to it.
2.4.2. The Exception
Because personality begins at birth as a matter of principle, an unborn body is not a person in the
eyes of the law and can have no rights. But this general rule is excepted in that personality may be
granted to a merely conceived baby without waiting for its birth for some purposes. As an
exception, personality of a fetus should be restrictively construed and it is applicable only in
certain circumstances. The circumstance generally revolves around the interest of the unborn
child. The law has invented this fiction only for the purpose of enabling the child (if it is born) to
take a benefit in all matters affecting its interest. This conception is based on the justification that
a child who has already lost its father while being in its mother's womb should not be subjected
to further pain of losing a benefit which it would have secured had it been born before its father's
death. So, when there is an interest of the baby at stake, the unborn baby in the womb should be
regarded as already born and should be allowed to take advantage of the interest.
The granting of personality to a fetus is subject to compliance with three cumulative

requirements. According to Art 2 of the Ethiopian Civil Code, “a child merely conceived is
considered as though born where its interest so requires provided it is born alive and viable”.
Thus, the three conditions are: the interest of the child must justify the grant of personality, the
child must be born alive, and it must be viable. These conditions are cumulative in the sense that
the missing of one suffices to deny the fetus personality.
In most cases, the interest of the unborn baby comes into the fore where a father dies before the
birth of the child leaving behind property. If a baby has to wait until birth to acquire personality,
i.e. if Art 1 of the Civil Code is strictly applied, it will definitely lose the succession to its father's
property because succession constitutes a juristic act and being a beneficiary when it opens
necessarily requires personality. Opening of succession is legally made at the death of the father
and the property would devolve upon those having the capacity and the right to succeed at such
time.
It is to be noted here that the merely conceived baby will be given personality (before birth) only
for the purpose of the particular interest that called for the personality. That means an unborn
child would be recognized as person only to benefit from the interest at hand, and it has to wait
until birth to acquire personality for all other juridical acts. Acquisition of personality for a
particular interest does not entitle one to exercise it across the board, and in effect personality at
conception is significantly reduced.
Besides the interest of the child, there remain two conditions: alive birth and viability. In order to
be considered as a person, the baby must be born alive so much so that, for instance, personality
will never be granted if the fetus is aborted. Viability refers to the ability to live or the potential of
surviving. This is to exclude from the ambit of personality impotent newly born babies or those
incapable of surviving because of some congenital factors.
The law takes certain presumptions to settle questions of what baby is viable and what is not. The
law irrebutably presumes that a child that lives for 48 hours after its birth is viable, so that no
17
contrary evidence can be admitted to disprove this presumption. The law also provides for
another presumption in the negative that a child that dies before 48 hours after its birth is deemed
to be not viable. But this presumption is rebuttable in that it can be shown to the contrary by
proving the child was viable. But we cannot challenge the non-viability of the child by using
deficiency in constitution as evidence. That is to say, if a child dies before 48 hours following its
birth due to a disease he caught in its mother's womb or due to other congenital biological
deficiencies, it will be conclusively deemed not viable. However, external factors that may have
caused the death of the child before 48 hours can be used to disprove the presumption of non-
viability. If, for instance, the baby dies on the 43rd hour after its birth because of mishandling by
nurses or by hunger or due to a car accident that occurred while it was being taken home from
hospital, all such can be employed to challenge the above presumption by proving that the baby
would not have died had it not been for the extraneous factors..
2.5. Capacity and Incapacity of Physical Persons
Capacity is a natural consequence of being recognized as a person before the law and it refers to
the authority to enjoy and exercise rights and duties by oneself. However, even if personality is a
necessary condition for capacity, it is not a sufficient one to enable one to personally carry out
juridical acts and certain conditions may incapacitate an individual still possessing personality.
Capacity or incapacity is usually thought of regarding two aspects: holding rights and duties, and
exercising rights and duties.
The principle governing the holding of rights and duties by physical person is that as soon as
personality begins all rights and duties are held by an individual. This means that as far as the
holding or enjoyment of rights is concerned, capacity is not only the rule but an absolute rule. It
can be inferred from Art. 1 of the Civil Code that entitlement to rights and duties under the civil
law belongs to all individuals by the fact of birth without any other condition attached to such
holding.
Capacity is the rule even in the case of exercising rights and duties a physical person holds. Since
holding rights and duties is meaningless without the authority to exercise same, the full exercise
of rights and duties in principle coincides with their holding. In the same way that all physical
persons enjoy rights and duties, they are capable of exercising the same by themselves. But in
certain circumstances it deems compelling, the law may explicitly declare that person is
considered incapable to exercise rights and duties. Since capacity is presumed in the exercise of
rights and duties (incapacity is very exceptional), the burden of proving the existence of
incapacity falls on the party who claims the incapacity. Thus, in all acts of civil life physical
persons may be assumed that they are dealing with equals who not only hold but also exercise the
same rights and duties as theirs.
Dear distance friend, you learned above that a physical person may be exceptionally enjoined
from personally exercising rights and duties because of existence of certain conditions expressly
recognized by the law. But even in such case, the prohibition is not total, i.e. the person is not
prohibited from exercising rights and duties altogether but only his personal exercise is
disallowed. He or she can still exercise rights and duties through another person by way of
representation. So, the effect of incapacity in exercising rights and duties is that the exercise
would be entrusted to a third person. Let’s now see in brief the legally prescribed conditions of
incapacity and their corresponding representation institutions. Some of the conditions are
18
protective of the interests of the incapable person (e.g. minority, judicial interdiction) while others
are either preventive or punitive of certain conduct (e.g. foreign citizenship, legal interdiction).
a) Minority: - Minority in civil law is an incapacitating condition that occurs because of age. A
person below the age of 18 years is called a minor and is incapable of exercising rights and duties
by him/herself. The law intends that these persons have immature intellectual faculty and lack the
proper degree of appreciation when they transact acts of civil life. The law interferes to protect
minors from exploitation by others. Accordingly, any civil act undertaken by the minor without
authority is subject to invalidation. A minor may, however, validly perform acts of daily life, i.e.
simple and small matters that are quite frequently done and that do not significantly affect the
legal position of the minor.
There are two institutions of representation recognized by the law to exercise rights and duties on
the behalf of the minor. One is guardianship, which is entrusted with the task of running the
personality affairs of the minor. Personality interests include food, clothing, shelter, and
schooling, and generally refer to the proper physical and psychological well being and growth of
the minor. The guardian is responsible for such interests of the child. The other representative
institution is the office of tutorship. Tutor is answerable for the protection and management of the
minor's economic (pecuniary) interests such as securing income, investing same, running
business, administering property and the like.
The incapacity arising as a result of minority may terminate through a couple of ways. A minor
obviously assumes capacity to exercise rights and duties him/herself when he/she attains the age
of majority (18 years). The incapacity of a minor may also come to an end through emancipation
even if the person is still below the age of eighteen. A minor may conclude marriage in
exceptional circumstances approved by the appropriate public body, and we call this situation
emancipation. This phenomenon suffices to end the incapacity of the minor and releases him/her
from the authorities of the guardian and the tutor.
b) Judicial Interdiction: - This is a court judgment that declares a person as incapable because of
mental conditions. The law steps in to protect the interests of persons with deteriorated mental
functioning as a consequence of insanity, infirmity, senility and the like. Insane persons are
believed to be unable to understand the nature and consequences of their actions because they
have got a mental disease. Infirm persons are those with serious physical deformities so that such
deformities will have the ultimate substantial reduction in mental functioning. For example, if a
person is simultaneously deaf-mute and blind, he/she is deemed to be infirm. Senility is
deterioration in mental faculty because of old age. The court can declare the interdiction of the
above persons with mental deficiencies.
Judicially interdicted persons will lose the authority to exercise rights and duties as of the date of
their interdiction. But they, just like minors, exercise rights and duties they hold through
guardians if the interest pertains to the personality of the incapable and through tutors where the
interest is a proprietary one.
Note that the offices of guardian and tutor have certain general features in cases of both minority
and judicial interdiction.
1. The offices are compulsory – it is a civil duty to become a tutor or a guardian and no
consent is needed.
2. The offices are in principle non-remunerative. A guardian or a tutor gives the service for
free.
19
3. The tutor/guardian must be a capable person. It is clear that an incapable person cannot
exercise representing others rights and duties that he/she cannot personally exercise.
4. The essence of the distinction between the offices of guardianship and tutorship is the
type of activity undertaken and it does not mean that two different persons should hold
the offices. Both functions can be assumed by a single person.
5. The offices are strictly personal in the sense that they cannot be delegated to the exercise
of third party or they cannot be transferred to next of kin through inheritance.
c) Legal interdiction: - This is an incapacity imposed by the law. A person will be legally
interdicted as a result of the pronouncement of a legally prescribed punishment for the violation
of criminal law. The prescribed sentence will deny the person the capacity to carryout economic
affairs. A legally interdicted person retains capacity over his personality interests and thus no
guardian is necessary. A tutor may represent the legally interdicted person to exercise the latter’s
pecuniary rights/duties. The assumption of the office of tutorship is, unlike that of minority or
judicial interdiction, voluntary. The evident reason is that a person who lost his privilege because
of commission of a crime should not be favored by compelling others to assume the role of
tutorship on his behalf.
d) Foreign Nationality: - This is a special incapacity because a person is prevented from

exercising specified categories of rights. For instance, the law states that a foreigner cannot take
part in governmental administrations. Likewise, a foreigner cannot (whether personally or
through an agent) own an immovable in Ethiopia, nor can he enter certain investment fields
reserved to Ethiopians.
2.6. Termination of Physical Personality

Article 1 of the Ethiopian Civil Code also provides for the way personality of individuals ends. It
states that human person is the subject of rights from birth to death, meaning personality ends at
death. In this case too, natural death and legal death of a person are co-existent.
Declaration of absence can, through interpretation, also result in termination of physical

personality. The law says that if a person's whereabouts are not known for a certain period
defined by the law, a judicial declaration of absence having the effect of death for all legal
purposes may be made. Among the effects of death are found the opening of succession of the
person and the remarriage of her/his spouse. But most importantly, absence with an effect of
death will end personality of the absence.
20
Review and Self-check Questions
1. Why is the knowledge of law of personality so important to a businessman or a

manger?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
_________________________________________________________________.
2. What are the differentiating points between artificial persons and physical persons?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________.
3. What is the effect of a civil act performed by a judicially interdicted person?

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
_________________________________________________________________.
4. Does the establishment of a partnership by, for instance, identifying the partners,
paying the capital and concluding the memorandum of association mark the beginning
of personality for that partnership? Why or why not?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
_______________________________________________________________.
21
5. Work out the following case by making correct reasoning:

A and B are spouses. They have a merely conceived baby who is expected to be born
after four months. On the last day of the sixth month of pregnancy of his wife, Ato A, the
husband, died due to car accident leaving behind a good deal of property. The mother
gave birth to a female baby who died only after 50 hours.
(a) When does the baby begin to have personality and for what purpose?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
__________________________________________________________________.
(b) Would there be a difference regarding personality of the baby if the father 10
hours after the birth of his child and the baby dies 20 hours later because of deficiency in
development? Explain.
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
____________________________________________________________________.
22
CHAPTER THREE
THE LAW OF CONTRACTS

This area is crucial for businesspeople and managers. Contracts are matters of daily life especially
in commerce. Thus, the knowledge of fundamental principles of contract law is of much help in
commercial success. Dear students, as a business professional you need to check yourself at the
end of this chapter if you have attained the following.
- Discovering the nature of a civil obligation;

- Comprehending the essential principles of contracts;
- Identifying and appreciating the essential requisites in the formation of contracts;
- Noticing the effects of contracts;
- Exploring issues of performance of contracts;
- Explaining non-performance and identifying the remedies.
3.1. Some Remarks on Obligations
There are all sorts of obligations imposed upon human beings: moral, religious or social duties. In
the area of social obligations, a special category is that of legal obligations which will have a
binding effect as opposed to the category known as natural obligations that are not compulsory or
binding on the parties. Legal obligations can be further split into penal and civil obligations. The
specific concern here is with civil obligations existing between private citizens.
Civil obligation is a general reference to juridical acts having distinct legal effects that exist
between two or more persons in their private relationships concerning something that one party
must undertake towards the other party. This sort of obligation involves a legal tie between the
persons it exists and it is fully enforceable by means of a legal action under the protection and
sanction of the state.
A civil obligation consists of a juridical relation between two persons, of whom the one entitled
to demand performance on the obligation is called creditor and the one who is obliged to perform
is called debtor. Thus, the obligation and its correlative right take the name of debt and credit
respectively. One of the parties occupies the active position of creditorship and the other assumes
the passive status of debtorship. Every obligation has a corresponding right, but the nature of the
right that corresponds to a civil obligation and enjoyed by the creditor is particularly a personal
right, i.e., it is a right against a designated person(s) or a defined class of persons, as opposed to
real rights which are enforceable against any one at all. An obligation exists between persons, be
they physical or artificial, while a real right involves the association of a person with a thing and
the person can pursue this thing into whosever hands it falls.
23
It is also the essence of obligations that that there is a cause from which the obligation proceeds,
persons between whom it exists, and something which is the object of it. The sources of
obligations are generally law and contract. In contract, the will of the parties forms the basis of
the obligation; in the absence of a contract, an obligation cannot arise except by virtue of the law
and therefore all non-contractual obligations have the law as their sole source. The obligations
originating exclusively from the law may be further founded on civil wrongs or unjust
enrichment. Thus, obligations usually emerge contractually by the natural agreement of the
parties and by the law when the legislator provides so in particular cases of torts and unjust
enrichment. But it is beyond the scope of this study to discus non-contractual obligations and our
focus is on contracts only.
3.2. Essential Notions of Contracts
Dear students, in this section I'll introduce you with certain fundamental quasi-philosophical
concepts of contracts including the definition given by the Ethiopian law. You are strongly
advised to exert your utmost effort to grasp these concepts because the whole discussion of
contracts centers upon these notions in one way or another.
The Ethiopian Civil Code, a systematized legislative document covering substantial areas of the
civil law, is predominantly influenced by the Romano-Germanic civil law tradition, and
accordingly shares much of the jurisprudential aspects of this super legal tradition particularly in
the area of contacts. The Civil Code's draftsmanship with a Romano-Germanic jurisprudential
background has established in contractual matters the theory of the autonomy of will. This theory
derives from the philosophy of economic liberalism, and embodies three major consequences:
(1) Contractual freedom: there is no obligation to contract; the contracting parties are free
to determine the scope of their contract; there is no special form for contracts because
consent is sufficient.
(2) Enforceability of contracts: a contract has the force of a law between parties. The
contract is compulsory even for the judge as he has to decide disputes by referring solely
to the provisions stipulated by the parties in their contract.
(3) The relative effect of contracts: a contract has no bearing on third parties, or parties
outside that contractual engagement are unaffected.
The above notions can be explained further by considering definitional attempts. There are also
other ideas related to contracts.
Contract is a binding agreement; it is a promise or set of promises for the breach of which the law
gives a remedy, or the performance of which the law in some way recognizes as a duty. A
comprehensive definition incorporating important elements is given under Art. 1675 of the
Ethiopian Civil Code. It states “a contract is an agreement whereby two or more persons as
between themselves create, vary or extinguish obligations of a proprietary nature''. The
contractual elements that emerge out from dissecting the definition and other related issues are
stated below.
A) Contracts are agreements – they are based on compulsory exchange of consent. There must
be an agreement as to every aspect of the contract, and this agreement must be meant to be legally
binding. And, conversely, there are agreements which do not give rise to a legal bond and
therefore not contracts. For instance, acts of courtesy, a ‘‘gentlemen’s agreement’’, a free
24
performance of service, or even a consensual relationship between neighbors to help each other,
are not contracts even if they are agreements. Therefore, we can conclude that while all contracts
are agreements, the vice versa is not true.
B) A contract needs at least two persons for its existence – there cannot be a one-one contract.
The contract is not a unilateral legal instrument which is an expression of a single person's
wishes. Such matters as a will drawing an order of succession, the acknowledgement of a natural
child, or the resignation made by an employee are all unilateral expressions of a person's intention
to generate juridical obligations. But none of these are contracts because a contract cannot emerge
by a single person's actions; contracts are bi-party juridical acts that exist between two persons to
the minimum.
C) Privity – a fundamental aspect of contractual liberty is the concept of privity of contracts. This
is the principle of relative effect of contracts so much so that third parties are not concerned by
the contracts made by other persons. The phrase “as between themselves” in the definitional
provisions of the Ethiopian Civil Code reveals the concept in that it is only parties to a contract
who are entitled to the benefits or burdened with the liabilities that arise from the contract, and
not third parties. In this regard, a contract is distinguishable from other collective legal
instruments which may be imposed on persons who did not take part in them. A decision taken by
a general assembly of shareholders, for instance, does create a binding obligation on the partners
of the company through the operation of the majority rule even though they had opposed the
obligation. The basis of a contractual obligation is the equality of the parties, an important aspect
of which is its affirmation of individual liberties. Thus, the right to enter into a contract is also the
right not to enter into a contract.
D) The object of contracts is the establishment and performance of an obligation – an

obligation is a legal tie (as defined previously), an action of being bound by a duty, and here it is
a freely imposed or accepted duty. Being the instrumentality of establishing a legal bond, entering
into a contract entitles the contracting parties to claim the assistance of public force, in the guise
of the courts and their officials, to obtain the performance of this contract.
E) Contracts can be concluded for the creation, variation and extinguishment of obligations:
An obligation may be created anew, may be amended in the course of its performance, and
finishes one day. These three purposes can be achieved by entering into a contract in each case.
The parties can, through the instrumentality of contracts, not only create legal bonds that had not
existed before but also vary existing contracts between them or, if they want to, can totally
extinguish obligation that had previously been in existence.
F) Contracts strictly speaking only concern proprietary, or better, patrimonial issues: they are
legal means of modifying economic positions of persons – that is why the law regards contracts
as concerned with ''obligations of a proprietary nature''. Thus, agreements in respect of personal
status, such as consent to marriage, divorce, or filiations, are not contracts because they are not
pecuniary matters in their strict sense. Agreements regarding personality obey different, special
legal regimes. It does not mean that certain patrimonial obligations do not derive from such
status-bound situations, such as the payment of alimony. But it means that they are not governed
by the general law of contracts.
G) There are conspicuously abundant types of contracts in economic interactions of persons:

For instance, we can consider the following lists (which is by no means limitative):-
- Onerous contracts in which both parties undertake towards one another an
obligation (e.g. sales contract), and gratuitous contracts in which only one of the
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parties undertakes an obligation towards the other party (e.g. contract of

donation).
- Adhesive contracts where one party can only accept or reject what the other
party proposes to him, and freely negotiated contracts.
- Private contracts where only the parties have signed, and authenticated
contracts concluded and registered before a court or a notary.
- Contracts in consideration of the personal traits of a contracting party, and
anonymous contracts which are '' personality trait'' free and standard for any
contracting party.
We can cite numerous other examples of contracts that can be validly concluded.
3.3. Formation of a Contract

Dear distance colleague, I hope you have understood from the pervious introductory part that
contracts emerge out from the free will of the contractants. But it may be the case that such free
will would be exercised improperly so that the economic interest that is the subject matter of a
contract may be prejudiced. A party may enter into a contract because the other party may have
improperly induced him to do so. So, there are two interests at stake here: one is that free will
must be reasonably made and must be legitimate in the circumstances; the other is that the formed
contract should be enabled to produce the economic effect it was intended for.
A striking balance between the interests is reaches by the law through the imposition of certain
non-derogable requirements in contractual undertakings. There is a vested interest for the law,
being cognizant of the possibility of abuse or prejudice of freedom to contract and of the
significance of contracts as instruments of economic performance, to intervene in contractual
affairs and set certain standards. The law regulates contracts in two ways. On the one hand, there
are provisions of the law that are deemed mandatory such as those regarding formation of
contracts from which contracting parties cannot deviate because of the need to ensure the free
exercise of contractual liberty and due to public policy reasons. On the other, the law provides for
permissive rules that serve the purpose of filling the gap that may be left by the contracting
parties – parties are free to determine whatever they like on such regard but the law steps in so as
to fulfill the contract should the parties fail to do so. Accordingly, the law has regarded formative
requirements as essential and, therefore, compulsory upon the parties to comply with. You’ll
learn about these essential requisites of concluding a contract in the sections that follow.
Article 1678 of the Ethiopian Civil Code states that no valid contract shall exist unless:-
a) the parties are capable of contracting and give their consent sustainable at law;
b) the object of contract is sufficiently defined, and is possible and lawful;
c) the contract is made in the form prescribed by law, if any.
Four mandatory conditions are evident in the provision above: capacity, consent, object and
formality. Let's turn ourselves on to briefly exploring their nature and scope.
3.3.1. Capacity
Much is said on legal capacity of a person to perform juridical acts. As contract is a juridical act,
remembering what is discussed in the foregoing chapter enables you easily understand
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requirement of capacity in the formation of a contract. The law of contracts itself does not address
the issue of capacity, which means it suffices to look into the general rules of capacity we
addressed in the precious chapter.
It is fairly enough to reiterate here that either because the person has to be protected (minors,
judicially interdicted persons) or because he undergoes a prohibition (legally interdicted persons,
foreigners) the law decides that they cannot enter a contract. They are incapable of binding
themselves to somebody else. But if they do conclude a contract, the sanction is the nullity of the
contract as claimed by a person whose incapacity is proved.
3.3.2. Consent
Consent is a defect-free mutual agreement by the contracting parties. It is a manifestation of

freedom of contract, and therefore is the basis upon which rests the entire law of contractual
obligations. Consent carries a double aspect: first, the parties must agree on the scope of their
undertaking (there must be an agreement on each and every important detail) and, second, there
must be a willingness on the part of the contractants to make their undertaking legally binding. It
is only when this double condition is present that the effectiveness of the binding nature of the
obligation is guaranteed by the civil law.
The existence or otherwise of these aspects and their consequential bearing on the validity or
otherwise of a contract is to be scrutinized by judges taking into account the circumstances of the
case. Regarding the first element, for instance, the court is to examine whether or not all details
are essential in that lack of consent on one detail might render the whole contract ineffective.
Certain details may be insignificant so that the presence or otherwise of consent will not have a
bearing on the contract as a whole and on the overall status of the contracting parties.
Furthermore, the parties need not necessarily express certain details in their contract so much so
that one should not hastily conclude these details are totally omitted from the contract and no
corresponding consent is given. The mere absence of some details does not mean that parties have
not consented to them, for consent is broad enough to be said existent having regard to custom,
equity and good faith.
The element of intention to be bound is an important psychological aspect that relates to the
contract as a whole. It refers to the state of mind of the contracting parties to cerate a legally
binding instrument. The mutual assent of the parties is deemed to have final legal force only if it
is accompanied by a genuinely made intentio obligandi (intention to be bound). Mere intention to
be bound existing only in the subjective state of mind of the parties does not suffice for the
purposes of the law. An intention which is not expressed in the contract makes the ascertainment
of its existence by the courts very difficult as the determination of a state of mind of a person is so
complex a matter. The law requires the intention to be bound to be declared so that the
willingness of the parties is externally manifested and this is deemed to simplify the work of the
courts and to reduce the possibility of disputes. Whether the declaration of intention is express or
tacit is not a question here, but only whether the declared intentio obligandi can be objectively
established. Further analysis of how consent is to be expressed is given below.
3.3.2.1. Offer and Acceptance
Ordinarily, mutual assent is evidenced by a contractual offer and acceptance. One party offers a
certain bargain to another party, who then accepts that bargain. The parties are required to
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manifest to each other their mutual assent to the same bargain. A contract is therefore the meeting
of the offer with an acceptance.
The two stages of offer and acceptance are sometimes much more slow to develop into a final
contract. There may have been a number of exchanges between the parties where conflicting
offers and acceptances were exchanged over a period of time and where, during the negotiation
process, an agreement was achieved only on certain terms and not on others. The meeting of the
consent of the parties may be fragmented over time before all these part agreements finally come
together to form a global contract. Regard is to be had to the final offer and acceptance that truly
manifest the mutual consent of the parties for it is only a finally made offer and acceptance that
bind the parties.
Offer
An offer is a firm and definite (precise) proposal made by the offeror (the party who takes the
initiative to conclude a contract) to enter into a contractual engagement regarding a particular
subject matter. It expresses the willingness of the offeror to create a binding obligation. Three
elements are necessary for an offer to be effective at law: serious intention (firm proposal),
certainty or definiteness, and communication.
An offer is firm when the offeror has a serious intention to become bound by the offer. But such
serious intent is not determined by the subjective intentions, beliefs, and assumptions of the
offeror. It is determined by what a reasonable person in the position of the person to whom the
offer is addressed would conclude the offeror's words and actions meant. Offers made in obvious
anger or undue excitement do not meet the intention test. Because these offers are not effective in
the eyes of the law, acceptance does not create a contract. For instance, suppose A and B ride
every morning to a school in A's 50,000 Birr worth car. One cold morning, both persons get into
the car, but A cannot start the car. A yells in anger that he will sell the car to anyone for Birr
10,000. The next morning B brought 10,000 Birr to take the car. Given these facts, a reasonable
person, taking into account A's frustration and the obvious difference in value between the market
price of the car and the proposed purchase price, would declare that his offer was not made firmly
and that B did not have a contract.
There are various proposals that are not legal offers. The concept of firm intention can be further
clarified by distinguishing between offers and numerous kinds of non-offers. As such, social
invitations, expressions of opinion, or statements of motive all do not evidence an intention to
enter into a binding agreement. If someone invites you to a dinner and later on tells you that he
has cancelled the invitation because he has got another appointment, you can't invoke the law of
contracts to enforce the promise because such social relationships are not normally intended to be
legally binding. Suppose again that you wanted a doctor to operate on your broken legs, and the
doctor, after making the operation, tells you that your legs would probably heal a few days later.
If your legs do not heal after a month, you can't win a suit against the doctor for breach of
contract because the doctor did not make an offer to heal your legs in two or three days but
merely expressed an opinion as to when the legs would heal. Likewise, if A says he plans to sell
his stock in XY S.C. for Birr 5000 per share, a contract is not created if you accept and tender the
5000 Birr per share for the stock. A has merely expressed his motive to enter into a future
contract for the sale of the stock, and no contract is formed, because a reasonable person would
conclude that A was only thinking about selling his stock, not promising to sell.
Another obvious non-offer category is constituted by advertisements, catalogues, price lists and
circulars. In general, these cases are treated not as offers to contract but as invitations to
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negotiate. For example, a seller's price list is not an offer to sell at that price; it merely invites the
buyer to offer to buy at that price.
In preliminary negotiations, a request or invitation to negotiate is not an offer. It only expresses a

willingness to discuss the possibility of entering into a contract. Similarly, when construction
work is to be done for the government and private firms, contractors are invited to submit bids.
The invitation to submit bids is not an offer, and a contractor does not bind the government or
private firm by submitting a bid. (But the bids that the contractors submit are offers.) In some
cases, what appears to be an offer is not sufficient to serve as a basis for the formation of a
contract. Particularly problematic in this respect are “offers” to sell goods at auctions. In an
auction, a seller 'offers' goods for sale but this is not a contractual offer. Instead, the seller is only
expressing a willingness to sell. The seller can withdraw the goods at any time before the sale is
closed by announcement or by knocking down of the auctioneer's hammer, unless the terms of the
auction are explicitly stated to be without reservation (in which case the seller is obliged to accept
the highest bid). In principle, there is no obligation to sell, and the seller may refuse the highest
bid. The bidder is actually the offeror and the contract is formed when that bid is formally
accepted.
The second requirement for an effective offer involves the definiteness of its terms. An offer must
have reasonably definite terms so that a court can determine if a breach had occurred and can
provide a remedy. Courts are authorized to supply a missing term in a contract when the parties
have clearly manifested intent to form a contract. If, in contrast, the parties have attempted to deal
with a particular term of the contract but their expression of intent is too vague or uncertain to be
given any precise meaning, the court will not supply a reasonable term, because to do so might
conflict with the intent of the parties.
A third requirement for an effective offer is communication of the offer to the offeree, resulting in
the offeree's knowledge of the offer. Ordinarily, one cannot agree to bargain without knowing
that it exists. Uncommunicated offer is no offer at all. The offer must also be addressed directly to
the offeree (the person to whom the offer is directed for his/her consideration) so much so that if
the offeree learns of the offeror's intentions from some other source, no legal offer results because
no offer has been communicated. The manner of communication need not necessarily be in
writing or oral; the law recognizes even signs and conduct as legitimate media for communication
of an offer in so far as there is no doubt as to the making of the offer.
Once an offer is properly made and made known to the offeree, it will be binding on the offeror.
The offeror cannot engage in activities that negate the offer, and his consent has the force of law
upon him.
Termination of Offer
An offer addressed to the offeree does not remain in force indefinitely. It will cease to have a
binding effect, and the offeror would be released from the legal bond. An offer terminates
generally by the action of the parties or through the operation of the law.
i) Termination by the Action of the Parties
An offer can be terminated by the action of the parties in any of three ways: by revocation, by
rejection or by counter-offer.
(a) Revocation: - refers to the offeror's act of withdrawing an offer. Revocation becomes
effective where it is communicated to the offeree before the offeree knows of the offer.
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Revocation practically operates as a mechanism of terminating offers especially where

there is a time between the making of the offer and the knowledge of the offeree. Thus,
revocation of an offer sent to the offeree through post can be made by using a faster
means of communication (such as telephone) so that the offeree knows of the withdrawal
notice before he does of the offer. In so far as it carries with it the test of offeree's first
knowledge, revocation may be accomplished by express repudiation or by performance
of acts inconsistent with the existence of the offer, which are made known to the offeree.
(b) Rejection: - this is the act of the offeree to terminate an offer. The offeree is free to accept
or reject the offer. If he elects to reject the offer and communicates same to the offeror,
the offer comes to an end even though the period for which the offeror agreed to keep the
offer open has not expired.
(c) Counter-offer:- A rejection of the original offer and the simultaneous making of a new
offer by the offeree is called a counter-offer. It is required that the offeree's acceptance
should match the offeror's offer exactly. Any material change in, or addition to, the terms
of the original offer automatically terminates that offer and substitutes a counter-offer.
The counter-offer, of course, need not be accepted; but if the original offeror does accept
the terms of the counter-offer, a valid contract is created (Art 1694 of the Civil Code).
ii) Termination by Operation of Law
The power of the offeree to transform the offer into a binding legal obligation can be terminated
by operation of the law through the occurrence of the following events: lapse of time; death or
incompetence of the offeror or the offeree.
a) Lapse of time: - An offer terminates automatically by law when the period of time specified in
the offer has passed. Such is the case with offers in which a time-limit has been stipulated. The
time-limit specified in an offer normally begins to run when the offer is actually received by the
offeree, not when it is sent or drawn up. When the offer is delayed (e.g. through misdelivery of
mail), the period begins to run from the date the offeree would have received the offer, but only if
the offeree knows or should know that the offer is delayed.
If no time for acceptance is specified in the offer, the offer terminates at the end of a reasonable
period of time. What constitutes a reasonable period depends on the subject matter of the
contract, business and market conditions, and other relevant circumstances. An offer to sell farm
produce, for example, will terminate sooner than an offer to sell farm equipment because farm
produce is perishable and subject to greater fluctuations in market value.
b) Death or Incompetence of Either party: - An offeree's power of acceptance is terminated when the
offeror or offeree dies or is deprived of legal capacity to enter into the proposed contract. An offer
is personal to both parties and cannot pass to the descendant’s heirs, guardian, or estate.
Furthermore, this rule applies whether or not the other party had notice of the death or
incompetence.
Acceptance
Acceptance is a voluntary act by the offeree that shows assent to the terms of an offer. It refers to
the pure and simple agreement given by the offeree to the offeror. In other words, acceptance
must be absolute and unconditional in the sense that one must accept just what is offered. This is
the mirror image rule which requires acceptance to mirror (reflect back) the full images of the
offer. So, acceptance must unequivocally conform to the terms of the offer; it must agree in the
manner, at the place, and within the time set forth in the offer. If the acceptance is subject to new
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conditions or if the terms of the acceptance materially change the original, the acceptance may be
deemed a counter-offer that implicitly rejects the original offer.
Acceptance must be communicated, and, conversely, uncommunicated acceptance is no

acceptance. Just as for the offer, the communication of acceptance does not call for any special
formality. The only requirement, similar to the case of offer, is to have no doubt as to the
intention to undertake an obligation. Thus, acceptance can be communicated expressly or tacitly.
The express acceptance may be oral or in writing. The tacit acceptance results from signs
normally in use or conduct such that there is no doubt as to consent. The above lenient approach
to form of acceptance is, however, excepted where the offeror stipulates a special form of
acceptance in the offer. Such a specific term is deemed to be part and parcel of the offer itself,
and therefore acceptance, by definition, must conform to the special form demanded by the offer.
If, for example, the offer states that acceptance is to be made in writing, the offeree is deemed not
to have accepted the offer purely and simply if he communicates his assent orally or through
conduct.
Dear student, do you think acceptance can be effectively made when the offeree keeps silent?
Silence is a borderline and problematic concept with regard to acceptance and communication
thereof. “Silence” in the legal sense of the word has to be defined. It should not be confused with
the simple absence of verbal or written expression, because an outward behavior other than
speech can be equivalent to a tacit acceptance. In other words, silence is the total absence of any
form of expression, be it verbal, written or behavioral.
The grand rule is that silence does not constitute acceptance, and this is set out in Article 1682 of
the Ethiopian Civil Code. This principle has a logical explanation deriving from the basic ideal of
contractual liberty. If silence is to amount to acceptance, a converse situation that imposes upon
offeree to resort to mechanisms of express rejection is created. This would make life unbearable
for all of us, who are constantly subjected to a stream of unsolicited offers. It would place the
burden of evidence of rejection on the client and be unreasonable. It in effect means that freedom
not to contract is significantly restricted and creates insecurity. Thus, to protect contractual
freedom, which also includes a freedom not contract, it is traditionally established that silence
cannot amount to acceptance and that some form of outward expression is needed.
The above traditional rule is, however, not without exception. According to Art.1683 of the Civil
Code, certain persons are required by law or by concession to conclude certain contracts on terms
stipulated in advance with any one who makes an offer to them. The explanation of this exception
goes like this. Certain activities may constitute public utility and are indispensable for the descent
life of the community. Moreover, it is probably the case that these activities provide limited or no
alternatives, and perhaps monopolistically held, with the consumer of such goods or services
vulnerable to denial of consumption. The modern conception of the duty of the state requires the
latter to supply “public utility” services to citizens. The state discharges such function through
granting certain economic operators the privilege to undertake the activities, and at the same time
imposing upon them the duty to accept any offer from the public, by either a special law (e.g.
establishment regulations for Ethiopian telecom) or a concession concluded between the
government and a private company.
The protection accorded to the public lies in the fact that the terms of the would-be contract are
fixed in advance by the relevant law or contract of concession. There is no negotiation possible; it
is a contract of adhesion for the client (consumer) and an imposed contract for the supplier of the
service if forced to accept clients. It is also noteworthy that although the supplier of the service,
the terms of the contract may not necessarily be profitable for the client. Since the law or
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concession requires the offeree to accept the offer, silence in such a case clearly amounts to an
acceptance. The moment at which the contract is concluded is upon the receipt of the offer. It
must be stressed that the contract is thus concluded through an offer, and not through the
acceptance. This means that not only does silence not reject an offer but also acceptance is not
necessary.
The second exception to the general rule that silence does not amount to acceptance is provided
by Art.1684 of the Civil Code in cases of pre-existing business relations. This is a concern of
contracting parties who have pre-existing or ongoing business relations and have previously
concluded a contract. If one of the parties proposes the renewal of an expired contract, the
modification of an existing contract or conclusion of another contract supplementing the first,
silence on the part of the other party results in acceptance. To be a bit specific, for example, an
offer to enter into a subsidiary contract that supports the previous contract or to conclude a
complementary contract that addresses a lacuna or omitted element from the first contract, can be
accepted through silence. Nevertheless, in respect of offers relating to pre-existing business
relations and their silent acceptance, the law additionally imposes the observance of certain
formalities: the offer must be made in a special document stating expressly that the offer will be
considered accepted if no rejection is made within a specified time, or absent such time,
reasonable period of time. A ‘special document’ is a document which is specific to the contract
and to the party concerned, and cannot be a general document sent to every body every time. This
shows that the law is taking a cautionary approach in derogating from the principle of silence as
not constituting an acceptance by adopting a restrictive application of the exception.
In connection with this question of silent acceptance, the law also addresses issues of invoices
(Art.1685) and general business terms (Art.1686). An invoice is merely a supportive document
drawn up by the seller and addressed to the buyer evidencing the delivery of goods in a sales
contract. It may be the case that the invoice contains terms not agreed upon by the parties. The
law thus, having regard to the unilateral drawing up of the invoice, declares that particulars
entered into an invoice are acceptable only if they conform to a prior agreement or if they have
been expressly approved, and they cannot be accepted through silence. Regarding general terms
of business, very often a trader drafts his terms of business for all future contracts by using a
special pre-written form, stating various specific clauses which he wants because they are in his
interest. Conversely, such clauses are not at the advantage of the other party, who is not
necessarily a trader. Such contracts of adhesion frequently give cause for suspicion, and the law
has rightly provided that such clauses would be inadmissible unless they are expressly known and
approved by the other party, or unless they are prescribed or approved by the public authorities.
A timely and definitive acceptance completes the contract. The issue as to when and where the
contract is fully created can be easily settled if the parties are present because no difference would
be there in place or time of offer and acceptance. A difficulty would, however, arise if the
contract is to be entered into between absent parties. The parties will be at different places and
they may enter into a contract using certain media of communication. Determination of place of
formation of a contract is important because it solves the problem of, for instance, jurisdiction,
applicable law and form of the contract. Ascertainment of the time when the contract begins to
have a legal force where a time-gap exists between offer and acceptance settles issues relating to
rate and amount of contractual interest, limitation of actions, and transfer of ownership, amongst
others.
For absent parties who conclude a contract by sending a letter using the mailbox, Art 1692 (1) of
the Ethiopian Civil Code provides that the time and place of conclusion of the contract is when
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and where the offeree sends his acceptance. The date of contract will be the date of expedition of
the acceptance, and it’s popularly known as the theory of emission or the dispatch theory. Certain
legal systems prefer the time and place of reception by the offeror of the acceptance; this is the
theory of reception. The solution afforded by the dispatch theory advantages the accepting party
because in case of a dispute it will be his local court that exercises jurisdiction and his local law
that applies.
The situation is slightly different if the absent parties intend to conclude a contract over a
telephone conversation and fail to specify the place of the contract. Art 1692(2) states that the
contract shall be deemed to be made at the place where the person was called. Here, the place
chosen is not the place from where a party sends his acceptance, but the place where he was
called, i.e. the place chosen by the caller. It seems that the caller is the offeror and the person who
is called is the offeree. Finally, even if the law has not expressly covered other modern means of
communication such as faxes and internet mailing, we can extend the provision on telephone call
to these cases because of their substantial similarity to phone call.
One point finally should be noted: termination of acceptance. Even if we have said above
(especially dispatch theory) that the making of acceptance completes a contract, Art. 1693(2)
opens a right for the accepting party to withdraw his acceptance. The timely withdrawal of an
acceptance amounts to destroy a contract which was validly formed unlike the case of
withdrawing an offer. Timely withdrawal of acceptance that terminates the binding effect of the
contract is that made before the acceptance reaches the offeror, in which case one could say that
the theory of reception is reborn in respect of the withdrawal of an acceptance.
3.3.2.2. Vices of Consent
Vices of consent are defects that vitiate the validity of consent so that consent fails to be given
freely and in full knowledge of the obligations. The theory of the vices of consent has to answer a
double and, to a certain extent, contradictory requirement. Its objective is on the one hand to
ensure justice by avoiding that persons are trapped against their will by given contractual
obligations. On the other hand, it is necessary to ensure that contracts concluded do remain secure
– too liberal an approach of the possible defects of contracts would bring about a great measure of
legal uncertainty. Article 1696 provides for a classical list of defects in consent – mistake, fraud
and duress. The law also adds to the above traditional “vice of consent” category the borderline
problems of unconscionable contracts. While the vices of consent proper address a psychological
issue, unconscionability is an economic vice consisting in the discrepancy between the real value
of the obligations subscribed and their contractual valuation. Art. 1710 of the Civil Code provides
for a different nature and scope in the case of unconscionable contracts.
The sanction of a vice of consent is relative nullity. This means that where it is established, this
type of contractual defect may only be raised by the person it intends to protect. If the contract is
voidable, it remains that this must be decided by a court ruling, and the mere fact that the vice
exists does not automatically nullify the contract.
1. Mistake
A mistake is ordinarily understood as an erroneous belief in the truth of a situation or in the

existence or otherwise of something, when in fact the contrary is the case. In its legal context,
there are certain qualifications attached to mistake and only certain types of mistake are
admissible in order to avoid too much contractual insecurity. Mistake constitutes a vice of
consent, and therefore a ground for nullifying a contract, only when it bears a double, cumulative
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nature. These natures are, first, the mistake must be decisive, and, second, it must carry on a
fundamental element of the contract.
Decisiveness is a subjective test that requires the mistaken party to establish that he wouldn’t
have entered into the contract had he known the truth or reality. But this must be a credible belief,
and not an unbelievable mistake. Decisiveness is not sufficient on its own, and an additional
objective criterion is inserted to evaluate mistake as a contractual vice, i.e., it must be
fundamental. An element of contract is to be regarded as an important component of the
agreement if it relates, for instance, to the identity or qualifications of the parties, the object of the
contract, the cause of the obligation and the like.
I) Mistake as to the Nature or Object of the Contract
An admissible mistake may relate to the legal nature of the contract. A buyer thinks that he
concludes a sale of a house, while he ended up in concluding only a lease contract. This is a
fundamental mistake and can be regarded as vice of consent. Mistake as to the object of a contract
is taken to refer to a situation where the extent of the performance promised by the party is
substantially greater or the extent of the benefit expected by the party is substantially smaller than
what he truly wanted. The issue is generally about the determination of the scope of the
performance.
II) Mistake as to the Person
In this case the mistake carries either on the identity or on the qualifications expected of the other
party. The identity or qualification has to be a necessary element of the contract either in general
opinion or having regard to the circumstances. For example, if A wanted to make a deal with a
famous musician who entertains his guests at a party, and if he later on discovered that the
contracting party has the same name but nothing to do with the famous artist, the mistake
becomes fundamental. Likewise, if a person intends to conclude a contract for the construction of
a house with a highly educated civil engineer but mistakably reaches an agreement with
uneducated construction worker, there is a mistake as to the qualification of the party and as such
fundamental.
Some mistakes may be non-essential in that they can be either neglected or corrected, and the
contract remains valid. Mistake regarding motive of the contractant is non-fundamental and does
not give rise to the invalidation of a contract because motive is something kept in the mind of
party and not communicated to the other. Arithmetical errors also produce the same effect (do not
invalidate a contract); they are simply corrected rather than invalidating the contract.
A claim of mistake to invalidate a contract is subject to the requirement of good faith. A

contracting party who made a mistake cannot base his defense on it in a manner contrary to good
faith. The contract remains unaffected should the other party wish to have the contract
implemented by making the mistake good. The bad faith of the mistaken party is most
appropriately sanctioned.
When a mistaken party invokes a mistake and succeeds in invalidating the contract, he has to
make good the damage that may be sustained by the other party. The mistake normally evokes
from the claimant, and the other innocent party should not suffer from his mistake – of course
unless the other contracting party knew or should have known of the mistake.
2. Fraud
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Fraud is another vice recognized by the law vitiating the consent of a contracting party. Although
it is a tort, it also affects the genuineness of the innocent party’s consent to a contract. The
transaction is not voluntary in the sense of involving mutual assent. When an innocent party is
fraudulently induced to enter into a contract, the contract normally can be avoided because that
party has not voluntarily consented to its terms. Normally, the innocent party can either rescind
the contract and be restored to his/her original position or enforce the contract and seek damages
for any injuries resulting from the fraud.
Dear student, having said this as an introduction, let’s turn ourselves to the substance of fraud, i.e.
the question of what really constitutes fraud in the eyes of the law that entitles a party to avoid
effects of a contract. But remember that we are not here to deal with every detail concerning fraud
but only the major ones. The important elements of fraud under the Ethiopian law are deceitful
practices, intent to deceive, and the innocent party’s justifiable reliance on the fraudulent practice.
Thus, mere false statements intended to deceive the other party to enter into a contract do not
constitute fraud because they lack “deceitful practice”. Likewise, deceptive silence (non-
disclosure of facts) would not amount to fraud. With regard to false statements and silence, every
person is expected to exercise care and judgment when entering into contracts and the law will
not come to the aid to one who simply makes an unwise bargain. Exceptionally, however, the
making of false statements and failure to disclose important facts constitute fraud if the parties
have a relationship of trust and confidence, called a fiduciary relationship. In such a relationship,
if one party knows any facts that materially affect the other’s interests, he must disclose them,
and, similarly, a party must refrain from providing a false statement that materially affects the
other party. An attorney, for example, has a duty not only to disclose material facts but also to
make truthful disclosures to a client. Such relationships include those between partners in a
partnership, guardians and wards, employers and employees, and the like.
In the absence of the above relationships of trust and confidence, no false statement or silence
would constitute silence. There must additionally exist a “deceitful practice” that requires certain
acts or conduct of the faulty. For instance, if the used car salesman manipulates the odometer, i.e.
the car accessory showing the number of kilometers the car has so far traveled, so that it shows
50,000 kms instead of the real 150,000 kms, he has engaged in a deceitful practice to encourage
the buyer in thinking this is a car with few kilometers, and so in a better condition – and more
expensive. If, however, the salesman says that the car has traveled 40,000 kms but did not
manipulate the odometer, it is a simple lie (a mere false statement) and the client can check
easily, and there fore no fraud is committed.
The presence of knowledge on the part of the faulty party that facts have been falsely and
deceitfully represented it also an essential element of fraud. Guilty knowledge signifies that there
was intent to deceive and hence fraud, and it could be committed intentionally or negligently. In
the absence of a negligent or intentional state of mind, it is difficult to conceive of a culpable
conduct constituting fraud.
Finally, fraud is completed when an innocent party justifiably relies on the trick designed by the
other party. If a deceitful practice thoughtfully made can be easily detected, one cannot be
justified in relying upon that practice. Fraud is deemed to exist and constitutes a defect in consent
not merely by resorting to a practice with intent to deceive but when accompanied by the
corresponding reasonable absence of knowledge on the part of the contractant affected.
Dear distance student, so far attempt is made to highlight upon the fraud committed by one
contracting party against the other. What if the fraud is committed by a third party, a person who
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is not a party to the contract? One must first mention to eliminate the case where a fraud is
committed by the person legally representing the contracting party, i.e. where an agent commits a
fraudulent act in the course of concluding a contract as part of his agency authorization. In such a
case, at least in respect of the plaintiff (the person who claims fraud has been committed against
him), the perpetrator is the person represented. Apart from such, the fraud committed by a third
party and not by a contracting party has no incidence on the validity of the contract. This is
normally justified by the principle of privity of contracts. The exception to this rule is where a
party to the contract knew or should have known of the contract. This helps the victim to avail
him/herself of a covert agreement between the party and the third party to set up the deceit.
The normal consequences of fraud are invalidation and the claim of damages. Fraud vitiates
consent and results in a relative nullity of the contract – the contract will be invalidated when a
fraud is claimed and established by the affected party and where the court declares the
invalidation. But because fraud necessarily entails fault, the duty of making damages good is
perhaps another logical sanction. The victim of the fraud can also claim the payment of damages
apart from or in addition to invalidation. If the party who is the author of the fraud sustains
damage because of invalidation by the innocent party, he cannot claim damages because it was
him who voluntarily created the fraud and hence the risk of damages.
3. Duress
Duress is an even more pressing problematic factor that can be legitimately said to have vitiated
consent of a contracting party. It involves conduct of a coercive character, that is, assent to the
terms of a contract is not genuine if one of the parties is forced into agreement. Forcing a party to
enter into a contract by threatening the party with a wrongful act is legally defined as duress. For
example, if A threatens to harm B or his family unless he (B) signs a promissory note for the
money that B owes, A is guilty of duress.
Duress is authored by a person and directed against the other. It cannot be said, for instance, that
duress exists where a party was forced to contract because of general circumstances, such as
when he had to sell his house because of the continuous decrease in price, or because of natures
forces, as when he was forced to buy new sheet of metal to replace the roof destroyed by a storm.
In other words, the vice of duress may only be established where the plaintiff (the person who
claims his consent is vitiated by the duress) proves the intention of another person to put him
under pressure to enter the contract.
The threat need not necessarily be physical; it could also be psychological in the sense that it may
be directed against the honor or reputation of a contracting party. Again, duress is recognized
where a threat of physical or moral harm is directed against a contracting party’s nearest relatives
– ascendants, descendents and spouse. Duress does not have to necessarily emanate from the
other contracting party himself; it may be evoked by a third party out of the contract. What is
important here is that a force that vitiates the consent of a contracting party is applied by another
party, whether this other party is the contracting party or not. Thus, the law regards as duress a
threat of harm against contracting party’s (or his ascendants’, descendants’ or spouse’s) life,
person, property or honor by whoever it might be inspired.
Duress should meet the requirements of ‘seriousness’ and ‘imminence’ in order to be effectively
invoked to invalidate the contract, according to the reading of Art.1706 of the Ethiopian Civil
Code. Seriousness refers to the gravity of the danger posed that would suffice to compel a person
to conclude a contract, and it would be determined by the court having regard to the
circumstances of the case. A danger is said to be imminent when it is on the verge of
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materialization or where there is almost no time gap between the communication of the threat and
its projected materialization. Hence, there is no duress if a party signs a contract under a pressure
that is fixed to happen several months later. Generally, duress must impress a reasonable person
so that the existence of duress is determined by the consideration of what a reasonable man would
have felt in the same circumstances. This objective standard of reasonable person is, however,
variable in respect of the identity of the victim of duress. The duress is differently appreciated
having regard to the age, sex and condition of the person. Thus, under this subjective evaluation
stage, an old sick person will be considered more influenceable than a healthy adult, a pregnant
woman more than the single woman, minors in their early teens more than a person in his late
twenties.
There are certain borderline cases where one cannot surely say duress exists. One is a special
form of threat, that of exercising a right. In such case, a person uses a legitimate right to force the
other to conclude a contract. Generally, the threatened act must be wrongful or illegal in order to
be regarded as duress. Threatening to exercise a legal right is not ordinarily illegal and normally
does not constitute duress. Suppose that A injures B in a car accident. The police are not called. A
has no insurance for his car, but he has substantial assets. B is willing to settle the potential claim
out of court for 5,000 Birr, which A refuses. After much arguing, B loses his patience and says,
“If you don’t pay me 5000 Birr right now, I’m going to sue you for 15,000 Birr”. A is frightened
and gives B a promissory note for 5,000 Birr. Later, A refuses to make payment. B comes back to
sue A for the 5,000 Birr. Although A argues that he was the victim of dress, the threat of a civil
suit is normally not duress. However, this is not the case of the right is abused to gain undue
advantage from the circumstances, such as, in the example above, when B demands A under the
threat of reporting the incident, which is also a crime, to the police to sign a promissory note for
50,000 Birr while he has sustained only a minor injury. If B succeeds in forcing A, A can later on
claim duress.
Another borderline case is reverential fear, where a person has a great respect for another, for
instance, vis-à-vis an ascendant or a superior. In fact there is no threat or action from the
ascendant or superior but simply the consequence of the normal relation between two persons
bound by this type of relationship. Entering into a contract as a consequence of such relationship
is in principle not a ground for invalidating a contract. But if such a relationship gives rise to that
of trust and confidence between the parties, and the other party knowingly gains excessive
advantage out of the contract, the party with the ‘fear’ can claim invalidation of the contract.
Economic need is generally not sufficient to constitute duress, even when one party exacts a very
high price for an item that the other party needs. If the party exacting the price also creates the
need, however, economic duress may be found.
At last, we come to a very peculiar scenario which is significantly related to duress and the above
borderline cases – unconscionability. Of course, the principle in a liberal economy embodies that
each party to an onerous contract (a contract concluded for consideration) will try to gain the best
advantage. So, the simple fact that the contract is unbalanced and burdensome to one party is not,
as a rule, a vice of consent. But public policy does exceptionally require that there be some limit
on the power of individuals and businesses to dictate the terms of contracts. The Ethiopian law
also decides to limit the liberal approach in favor of weaker parties who have in fact been
exploited. The purpose of legislative interference here is to avoid cases if unconscionability by
entitling the economically exploited party to invalidate the unconscionable contract.
Unconscionability exists, and invalidates a contract, subject to the satisfaction of three conditions:
- the existence of “substantially more favorable” advantage to the stronger party;
- consent induced by the want, simplicity of mind, senility or manifest business
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inexperience of a contracting party;

- justice requiring the invalidation of the contract.
Although judges have a wide discretionary power in the appreciation of issues of

unconscionability, the cumulative existence of the above three factors is deemed sufficient for the
invalidation of the unconscionable contract. Here, there are certain terms used by Art.1710 (2) as
elements of unconscionability that need to be defined. ’Want’ is a situation where a person lacks
a commodity, in a somewhat less stringent a manner than the state of necessity. “Simplicity of
mind” may refer to a minor form of mental illness or, even in the absence of such an illness, the
state of mind of a young and/or an uneducated person. One can describe ‘senility’, in the context
of unconscionability, as the degradation of mental capacity, which has not yet reached the stage
of judicial interdiction. Finally, “manifest business inexperience” is about understanding a person
who has no trading experience whatsoever, i.e. the law authorizes the judge to appreciate the
economic exploitation that may be faced by a party manifestly lacking experience how to deal
with economic transactions.
3.3.3. Object of Contracts
Dear students, you have studied the first essential elements to have a valid and binding contract;
you have also seen the voidability of a contract formed without complying with those elements.
These are capacity and consent of the contracting parties. This part introduces you with a third
essential requisite for the formation of a valid contract. To remind you once again of the
provisions of Article 1678 of the Civil Code, “no valid contract shall exist unless the object of the
contract is sufficiently defined, and is possible, and lawful …”
By “object” one must not be confused with a thing, movable or immovable, concerned by the
contract. The expression “object of the contract” as employed by the Ethiopian Civil Code refers
to the obligations undertaken by the parties in a given category of contract. In a typical sales
contract, for example, the payment of the price by the buyer and the delivery of the good by the
seller are the objects (obligations) of the contract. The object of the contract is thus the legal
result which the parties wish to achieve.
The freedom of contract is still upheld so that the parties are free to determine the obligations in
their contract. Parties have the right to define the nature and scope of the obligation they
subscribe. But, failure to define the object is a critical defect, and makes the contract void and
null. If the object is present, it should be determined or at least determinable. The principal
faculty of determination of the object of a contract resides with the contracting parties
themselves, but lacunae (gap) left by parties may be filled by making a reference to custom, good
faith and equity. Generally, object must be sufficiently defined or determinable in order to create
a valid contract.
The object (obligation) undertaken in the contract may take one of three broad forms: to do, to
give, and not to do. In obligation to do, a party undertakes to act in a way required by the other.
Such obligations are themselves divided into two sub-categories. One is obligation of result in
which a definite end is to be achieved under the contract, and the other is obligation of means in
which a party undertakes to do his/her best to achieve the result without guaranteeing the
achievement of an outcome. In obligation to give, a party undertakes to transfer a right (such as
full ownership) on a thing to another party. Finally, obligations not to do are negative obligations
that require a party to refrain from acting some way. Any obligation in respect of all the above
scenarios needs to be defined with sufficient precision.
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In addition to its sufficient definition, object of a contract must be possible of execution. A

contract which is impossible to perform cannot be enforced. Thus, if the parties stipulate an
obligation that is impossible at the time of the conclusion of the contract, the contract is deemed
as if never created. Nevertheless, the impossibility must be absolute and insuperable. An absolute
impossibility is one which is general and is the same for any contract in the same circumstances.
An insuperable impossibility is one which is completely impossible for any body, or one which is
humanely impossible to achieve. Again the impossibility need not necessarily be physical; it can
also cover situations of legal impossibility. For instance, it is legally impossible for a person to
buy through a contract a thing which is already his property.
An equally indispensable requirement with regard to object of a contract is that it should be

lawful and moral. An unlawful or immoral object nullifies a contract, for it is self-contradictory
for the law to recognize as legal instruments contracts with unlawful obligations. For example, an
agreement for murdering a person cannot be legally enforced for its object, i.e. homicide, is a
crime under the criminal law. In addition to legality, obligations should pass the test of morality.
More often than not, law and morality overlap so that what is immoral is also illegal, and there is
a strong ground to make the contract void. Sometimes, however, what is immoral may not be
illegal. In this case immorality suffices to nullify the contract. For example, prostitution is not
illegal but immoral in Ethiopia. So, an agreement of doing sexual intercourse for payment cannot
be legally enforced for the object is immoral. The case of unlawful or immoral motive must be
clarified here. Motives to enter into a contract are very private to the contracting party, and
therefore are difficult to ascertain, and thus they are not taken into account to determine whether a
contract contains unlawful or immoral object. But if the motive is manifested directly or
implicitly in the contract, it will be taken into account to determine the unlawfulness or
immorality of the object. For instance, if it is declared in the contract of sale of a knife that the
buyer wants to use the knife for stabbing someone else, the contract is void because the motive
shows an unlawful object, i.e. stabbing.
3.3.4. Form of Contracts
Form is the outward appearance of the contract, and so the way the will of the parties becomes
apparent. There are two extreme scenarios with regard to formality requirements – formalism and
consensualism. Consensualism bases the contractual form solely in the partner’s consent, which
can be purely tacit in so far as it signifies the declaration of will. Formalism on the other hand
will only acknowledge a contract where an exterior, visible sign is made so much so that actual
will of the party will be regarded as secondary in so far as the contract is expressed in a certain
way.
Consensualism has the virtue of stressing the individual person’s freedom to contract. Not only is
it, this context, a from of human rights in economic affairs but it is also cheap, fast, simple and
the manifestation of society of equals. Excessive formalism in contracts is burdensome and costly
because it calls for the intervention of legal professionals or generates administrative fees and
taxes at the expense of the contracting parties. It can also be abused by parties in bad faith who
try to manipulate formal defects when they have no substantive defenses to support their claim.
But formalism is not without merits. It protects parties from acting too fast, without thinking
about their commitments. Forms tend in contemporary legislative acts to protect the weaker party
in a contract, because very often there is an economic imbalance and parties are in fact unequal.
A well employed form is a good preventive weapon against disputes, and its precision can greatly
help the judge easily settle any litigation which may arise.
The Ethiopian law takes a middle position compromising between the dangers of excessive
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formalism and advantages of relative consensualism. In pursuance of this, Article 1719 of the
Civil Code provides that no special form is required of parties when they conclude a contract and
consensualism is upheld in principle. But the law imposes a certain formality requirement. In
addition, parties can impose upon themselves the compliance with a certain form. In both
exceptional cases, formality must be observed and parties are not free to set aside the prescribed
formal requisite. Strict compliance with a legally or contractually stipulated formality is a validity
requirement (ad validitatem) and sanction for the non-observance of such requirement is the
absolute nullity of the contract. The question of validity is a more fundamental a matter than the
dictation of form to provide proof of the contractual obligations, i.e. ad probationem, because it is
concerned with the very existence of the contract. Thus, failure to comply with the exceptionally
imposed formality requirements would render a contract null and void.
Dear distance student, we shall now see some specific cases where the law imposes a formality.
But first remark must be made of contracts made in writing. Written contracts must be signed by
all the parties for signature signifies the individualized consent of a party. Again, they should be
attested by at least two witnesses, or in some cases they may be alternatively authenticated by a
public authority.
One of the formality provisions (Art.1721) states that a preliminary contract has to be concluded
in the form of the main contract. Let’s assume that A, residing abroad, wants to conclude a
contract of insurance with an insurer in Ethiopia and intends to authorize an agent, B, to make a
deal on his behalf with the insurer. The contract of agency concluded between A and B is a
preliminary contract because it paves the way for the conclusion of the contract of insurance, the
main contract. Now if the insurance contract is made in writing, the contract of agency must also
be made in writing. Art 1722 requires contracts for the variation of a contract to be made in the
form of the main contract, i.e. the varied contract. The main contract’s form thus extends to
contracts made after its conclusion. In the two cases above, the law intends to ensure consistency
of form between essentially related contracts concluded between the same parties.
Another contract in respect of conclusion of which the law demands a special formality is that
relating to immovables. Contracts concerning immovables include sale, mortgage, usufruct, lease,
and partition amongst other things. All such contracts relating to buildings and land have to be
concluded in writing and need to be registered with the authorities. Immovable property involves
huge capital and the law imposes a written and registration formality to ensure security of
transactions regarding such an important asset.
Again, contracts to which a public administration is party must be made in writing and be
registered with a court or notary. The state and its administrative departments are guardians of the
public interest at large and therefore must conduct their operations within an atmosphere of
transparency. And transparency is best guaranteed if affairs are documented. So, we can see the
advantage of imposing a writing formality whenever the state and its organs become parties to
contracts.
The law also demands a formality requirement with regard to contracts that last for a longer
period of time. It is obligatory that a contract for a longer period of time be made in writing. The
reason for such a requirement is obvious: unwritten agreements may not be easy to prove as
witnesses may die, human memory may fade away as time passes. In order to avoid possible
future dispute, the law rightly requires contracts that work for long period of time to be made in
writing. For example, contract of insurance is given in the illustrative list of contracts for a longer
period given by the law, for it stays for a relatively longer time. Employment contract made for
an indefinite period of time also constitutes such a category. So, both insurance and employment
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contracts need to be made in writing.
3.4. Effect of Contracts

The general effect of a validly concluded contract is its legal enforceability. Once they have
created a contract between them following legitimate formation requisites, parties are obliged to
comply with the terms the breach of which would entail a legal liability. Thus, as clearly
stipulated under Article 1731 of the Civil Code of Ethiopia, the terms of a contract shall be
binding on the parties as though they were law. A party cannot unilaterally change his mind with
regard to a contract created by the mutual consent of the contracting parties. Contracts are the law
of the parties from which derogation is disallowed and, as the famous English saying goes, a
man’s word his bond. They are binding not only on the parties but on the judge himself (the
adjudicating organ) in the sense that the judge will give effect only to the validly made terms of
the contract whenever a dispute appears before him.
A contract may contain ambiguous provisions; it may also have terms that apparently conflict
with each other. These problematic terms may not be sufficient to invalidate a contract or
otherwise render it ineffective. Here the court is authorized to remedy the defective terms through
interpretation having regard to the common intention of the parties, custom, good faith and
equity. But if the terms of the contract are clear even if they may appear to be unfair, no
interpretation is allowed. The judge cannot create a contract for the parties under the guise of
interpretation when the terms are clear, for this amounts to binding parties with an obligation they
have not intended. So, a validly formed contract will be legally binding on the parties to the
extent clearly spoken by its terms or to the extent substantiated through interpretation by courts if
the terms happen to be unclear.
3.4.1. Performance of Contractual Obligations
Performance is the execution of the obligation as per the terms of the contract. In the normal
course of things, a contractual obligation is to be discharged through performance. Indeed
performance is the purpose for the contract is formed in the first place, and is deemed to be the
natural consequence of a contractual engagement. It is to the interest of the law to see contracts to
hit their target, and it accordingly provides for the mechanisms of ensuring such performance.
(a) Performance by Whom?
Who makes the performance is an important question because it helps to identify person obliged
to perform a contract and to inform him of the consequences of his performance. The obvious
answer to the above question is that the debtor is the one who is demanded to make performance.
But performance can be validly made by anyone authorized by the debtor, by court or by the law.
The debtor may authorize an agent to carryout an obligation. Likewise, a court appointed tutor
can discharge an obligation on the behalf of a judicially interdicted debtor, and legal heirs can
execute the debts of their deceased relative if they accept the succession. So, in principle anyone
can perform the contract, and normally there is no difference whether the contract is performed
by the debtor himself or by a third party.
Nevertheless, personal performance by the debtor may be an essential element of the contract. In
such case, no valid performance is made unless discharged by the debtor himself. It is of a special
interest to the creditor that performance be made by the debtor himself. For example, employment
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contract by its nature needs performance by the employee himself. The employee cannot delegate
his job to someone else because personal discharge is of special interest to the employer. But
generally, where the personality of the contracting party is not important a contractual obligation
may be performed by any third party.
(b) Performance to Whom?
This question is concerned with the party entitled to receive performance. Normally performance
can be made to the creditor or a third party authorized by the creditor, by the court or by law.
Performance made to unqualified person is invalid in the eyes of the law. For instance, a legally
incapable creditor cannot receive payment personally, and such payment shall not be valid unless
the debtor shows that the payment has benefited the creditor; the burden of proof is on the debtor.
The debtor has to take utmost care when he makes the performance; otherwise he is obliged to
face the risk of double (second) payment.
Even though as a rule payment made to a person unqualified (unauthorized) to receive on behalf
of the creditor is invalid, it becomes exceptionally valid if the debtor shows that the payment has
benefited the creditor, if the creditor confirms the payment or where it is made in good faith to a
person who appears without doubt to be the creditor. The performance is deemed to be made the
advantage of the creditor where there is a practical enrichment or increase of his estate. With
regard to the validity of a performance made to persons who undoubtedly appear to be creditors,
appearance does not mean physical resemblance but rather it refers to a person who appears to be
authorized to receive the payment. The debtor is discharged with respect to the true creditor if the
pays in good faith to a person who has no right to receive but who unequivocally seems to be the
creditor. This can be particularly exemplified when the debtor makes the performance to an
apparent heir because of death of his real creditor.
When there is doubt as to who the true creditor is, the debtor may refuse to pay and release
himself by depositing the amount with the court. For instance, where there is a litigation going on
among the would-be creditors which the debtor knows and makes the performance to one of the
claimants, he does it at his own risk (he will bear the risk of second payment). On the other hand,
where the case is pending and the debts due, any of the persons who hold themselves out to be
creditors may require the debtor to deposit the amount with the court.
(c) What Things (Goods or Services) are to be offered in Performance?
The provisions of Article 1745 underline the requirement of identity of the object offered in
performance with what was agreed in the contract. Contracts are laws for the parties, and what
must be offered is exactly what they have agreed. A contracting party cannot discharge his
obligation by offering his creditor something else than what he promised, even if the other thing
is of an evidently greater value than the thing agreed. This way, the law gives priority to the
compliance with the agreement between the parties rather than the value of the thing.
Logically enough, the creditor is also entitled to refuse partial performance. This is grounded on
the idea that the creditor may not be forced to grant the debtor an extended delay for performance.
And conversely, the debtor is obliged to make partial performance if part of the debt is contested.
The debtor must pay the non-contested part, pending dispute on the contested part, and cannot
delay its payment until the dispute is resolved.
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The situation may be a bit complicated where the obligation is made regarding fungible things.
Fungible things are those things that can replace each other without causing substantial
difference, or things that are described normally in generic terms. Coffee and crops are good
examples. Questions of quality and quantity might arise at the moment of performance of the
contract. If the parties have specified the thing or expressly agreed on the quality and quantity of
the thing, that must be complied with. But in the absence of such an express stipulation, the
debtor is given a right to choose the thing to be offered in performance. But the thing chosen by
the debtor must be of at least average quality; he can’t offer in performance a thing of lesser
value. But overall, slight variations in quality (average or stipulated in the contract) or quantity
must not be refused by the creditor. The creditor can either proportionately reduce his own
performance or claim indemnity for the slight variation. The purpose of such a provision is to
ensure that a maximum number of contracts are performed in the interest of a dynamic economy,
and, conversely, that parties avoid taking the pretext of smallest non-conformity to nullify
contracts.
(d) Place and Time of Performance
If the parties determine the place of performance, their agreement is respected. But where no
place has been agreed, a permissive provision of the law stipulates that performance shall take
place at the place where the debtor had his normal residence at the moment of concluding the
contract. This general rule is excepted regarding specific things. If no agreement is made to the
contrary, performance in respect of a definite thing shall be made at the place where such thing
was situated at the time when the contract was concluded.
Similarly, the time of performance can be agreed upon by the parties. Where there is no such
time-limit is stipulated in the contract, performance would be made forthwith (immediately).
There is no problem if the debtor performs the contract immediately after its formation. But the
creditor demands performance from the other party after lapse of reasonable time. The creditor
can oblige the debtor to perform the contract when he benefits by a time-limit or after he
performed or offered to perform his obligations towards the debtor.
(e) Other Issues Related to Performance
A question may arise as to the currency of payment regarding the performance of money debts.
As a rule, money debts are discharged in local currency, in the currency that is the legal tender of
the country where payment is to be made, even if the amount is stated in the contract in a foreign
currency. Still parties are at freedom to reach an agreement to the contrary, or to exclude the
making of payment in local currency. Sometimes parties may leave price for determination by
reference to an index made up of certain goods or services without indicating a specific amount of
currency. This is indeed a usable and frequent technique which enables one to take into account
monetary instability and inflation.
The issue of interest and its rate is also an important matter in performance of contractual
obligations. The Ethiopian Civil Code under its Article 1751 provides that the legal rate of
interest that is to be paid on a debt is 9% unless the parties expressly stipulate a different rate.
Even if parties can stipulate interest and fix its rate in their contract, they cannot fix the interest
rate higher than 12%. Twelve percent interest rate is a maximum rate over and above which a
crime of usury is committed. In case parties fail to provide a rate or fix it above 12 %, the legal
interest rate ( 9%) is due on the debt and is payable.
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To what obligation does a given payment apply? This question arises in case several debts are due
in a contract and the amount the debtor provides for payment is insufficient to cover all the debts.
A given contract may give rise to costs, interests and the principal debt, and all such obligations
may mature to be discharged. If the amount available for payment is inadequate to pay-off all the
debts, determination of the order of payment becomes an important matter. The law lays down a
rule that a partial payment is used to cover first costs, then the interest due, and finally the
principal debt. This solution is intended to favor creditors in that they will get paid first the
accessory elements of the debt and they will be enabled to gain extra payment as potential interest
on the remaining main debt.
Performance of contractual obligations usually entails expenses. Any accompanying cost while
performance is made is to be covered by the debtor himself. As a rule, the duty to perform a
contract and the bearing of costs of the performance are essentially related matters and are
therefore naturally attributed to the debtor, the party who is obliged to perform the contract. But
the contracting parties can agree on who bears the expenses of performance and such agreement
will be effected without having regard to the suppletory provisions of the law on the issue at
hand.
3.4.2. Non-performance of Contracts
Non- performance of a contractual obligation refers to the breach or the non-compliance with the
promise made in the contract. The breach of a contractual obligation exists when a party totally
fails to carry out the obligation, if he makes fundamentally defective performance, or makes a
delayed performance. The cases of defective performance (e.g. partial performance) and delayed
discharge are to be closely scrutinized to decide if they really constitute non-performance.
Dear student, we have time and again said that contract is the law of the contractants and will be
indeed legally binding on them. That’s to say, no party can unilaterally disregard a contractual
obligation and act as they wish. The binding nature of a contract is manifested by the legal
liabilities imposed on the defaulting party in the event of its breach. There are remedies available
to the victim of the breach and, at the same time, the defaulter cannot go with impunity.
The remedies of non-performance at the disposal of the creditor are not usually to be claimed
immediately after the expiry of the time fixed in the contract. The remedies usually overlook
normal performance because they are based on the failure of the performance. But contracts are
created to be discharged through normal performance and the law declares its utmost intention to
ensure performance of the contract. Therefore, the creditor is supposed to comply with a
procedural requirement before he rushes into the legal solutions. The procedural device is the
giving of a default notice, so called because it is made after the normal performance failed and is
directed to the failing party. The debtor may have simply forgotten the performance of the
contract, or he may fail to perform because of some personal problems. Rushing into legal
remedies not only defeats the purpose of the contract but frustrates innocent debtors and thereby
jeopardizes the smooth relationship between the parties. Thus, the law rightly requires awakening
or reminding the failing party to perform the contract by giving him a chance through a default
notice. The notice helps one to determine if a debtor is willing or able to perform the obligation.
The rule is that default notice is given before resorting to the legal remedies in cases of non-
performance. But exceptionally the giving of default notice may become unnecessary. Below
follows the brief overview of cases where the creditor can resort to remedies of non-performance
without placing the debtor in default.
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The obvious case is the contrary agreement of the parties. Like many other legal provisions, the
rules of contract law that require putting debtor in default are suppletory (permissive) so much so
that parties can expressly exclude the necessity of giving default notice. This means that the non-
performance of a contract entitles a creditor to directly avail himself of the legal remedies.
A slightly different scenario is presented where the date of performance is compulsory or

essential. If the debtor fails to perform the contract on such date, no need of giving a default
notice. In illustration of this, suppose A concluded a contract of hiring of Velo (a bride’s clothing)
with B for her sister’s marriage. The date of marriage is scheduled for April 25, 2008 and B did
not deliver the Velo on that date. The time of performance is very compulsory and is indeed
essential so that the delivery of the clothing after the scheduled date is purposeless. Delivery on
that very date has become an essential requisite of the contract and no performance can be
effective after such date. A is free to claim the remedies of non-performance without the need to
put B in default.
Where the obligation required of the contracting parity is not to do and the party breaches this
duty by doing (acting otherwise), the creditor of the assumed obligation cannot be obliged to
notify the defaulting party. The debtor has resorted to a conduct that he was supposed to refrain
from under the contract, and notifying him of his violation is pointless as the risk that the contract
intended to prevent has already materialized. If, for example, X concluded a contract not to
compete in business with Y and if X later on enters competition with Y, no default notice is
necessary and Y can directly invoke the remedies of non-performance.
Default notice is also not necessary where a debtor has declared in writing that he would not
perform his contractual obligation. The purpose of notice in the first place is to remind the debtor
to perform the contract. So, requiring notice while the debtor is clearly refusing performance does
not serve any purpose.
So, what are these remedies that are to be claimed for non-performance either after giving notice
or immediately where notice is unnecessary? Under the Ethiopian law, the other party can
demand the following according to the circumstances:-
 Specific performance, or
 Cancellation of the contract by court or by himself, and
 Damages caused to him by non-performance be made good (Article 1771
of the Civil Code).
The first two remedies, i.e. specific performance and cancellation, cannot be claimed together for
the invocation of one would naturally exclude the other. A party invoking specific performance
cannot at the same time invoke cancellation and vice versa, because the two do not go together.
But damages can be claimed in the absence of either of the other two, or in addition to either of
them. In other words, the claim for making damages good can be lodged with either specific
performance or cancellation.
3.4.2.1. Specific (Forced) Performance
When a debtor fails to perform his obligations, the first legal remedy available to the creditor is to
request the court to force the debtor to perform. Specific performance as a legal remedy is not
something always awarded to the creditor whenever he demands it. The law states that forced
performance of a contract shall not be ordered unless it is of a special interest to the party
requiring it and the contract can be enforced without affecting the personal liberty of the debtor.
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Thus, forced performance is the outcome of two cumulative conditions: Special interest of the
creditor and execution without encroaching the personal liberty of the debtor. If either of these
conditions is missing, forced performance cannot be had.
It may be said that the forced performance of the contract is essential to the creditor if he cannot
enter into another similar contract or if he does not have alternative mechanism of fulfilling his
wish. For instance, if A agreed with B to sell an object that is not found any where else and if B
highly needs the thing, B can claim the forced performance of the contract in the event A fails to
carry out his contractual obligations. But, if B can get the thing somewhere else even for
substantially higher price, he can’t seek specific performance. He can however claim the
difference in price to be compensated by the debtor.
Personal liberty is a constitutional right (indeed a human right) that is internationally recognized
and protected. So, it cannot be restricted by contractual engagements under the guise of forced
performance. The non-performance of a contract is a breach of civil obligation and has got a
monetary correspondent. Personal liberty is a fundamental human right that cannot be alienated
from a person and cannot have a pecuniary value. Thus, non-performance of a contract and
personal freedom of an individual are two separate and extremely disproportionate interests, and
the occurrence of the former cannot in any way affect the later. For instance, A concludes a
contract with B, a singer, to entertain customers at his grocery. B fails to show up for the
performance. Now A cannot claim the forced performance of the agreement by B because this
affects B’s personal liberty. It has the effect of forcing B to personally appear on the stage and
perform without his will, and this undoubtedly denies B of his liberty.
3.4.2.2. Cancellation
Cancellation is another remedy of non-performance available to the creditor. One has to

distinguish cancellation from invalidation and termination of contracts. Both cancellation and
invalidation presuppose a problem with the contract – the former involves non-performance and
the latter arises in contracts with defective formation. But termination is a defect-free mechanism
of extinguishing contractual obligations by the mutual agreement of the parties. The effect of
invalidation and cancellation is the reinstatement of the parties to their former positions. The
parties are as far as possible to be restored to the economic status they would have assumed had
they not entered into the contract. All the three have one thing in common: they are
instrumentalities of extinguishing (breaking a legal bond) obligations between the parties.
Cancellation as a remedy for non-performance is in principle declared by the court. But as a

mater of exception, it can also be unilaterally declared by the parties, usually the creditor. We will
see the two one by one below.
i) Judicial Cancellation – This refers, as just highlighted above, to the situation that the judiciary
(the court) is vested with the power to render a final and definitive declaration of cancellation
producing full legal effects. The purpose of submitting cancellation to the judiciary stems from
the very sanctity of contractual obligations. It means that the contract is the law of the parties and
they must do their best to maintain the contract rather than demean it by being able to escape its
imperative provisions too easily. The non-performance of the contract must therefore be of some
importance before it is made to result in the cancellation. There are certain borderline cases which
may be easily remedied to uphold the contract such as partial performance, defective
performance and delayed performance. All these considerations explain that cancellations call as
a rule for judicial decision, and that the court is never compelled to sanction contractual defaults
46
by ordering cancellation. Thus, the submission of a cancellation case to the court helps to avoid
the rush to create contractual instability by the parties and to make only warranted cancellations.
However, there are guidelines which the court takes into account while examining a cancellation
case that the law has devised to minimize the subjectivity in judicial discretion. The guidelines
include interest of the parties and the requirements of good faith, and the breach of fundamental
provision of the contract. The court must see to it that the cancellation is consistent with the
interest of the parties and that it is demanded by good faith considerations. The ‘fundamentality’
of the breach needs to be proved in the sense that the non-performance affects the very basis of
the contract which would have led a reasonable person not to enter a contract.
ii) Unilateral party cancellation – Even though the value legally attached to discharge through
performance and, if that fails, to cancellation by the judiciary is great, there are certain obvious
breaches of a contractual obligation that do not need ascertainment by a court. In such cases,
policy dictates that the party himself should be able to cancel the contract. These exceptional
scenarios are geared toward the prevention of prolonging the inevitable – circumstances so
obvious that there will be no reason for the court not to grant cancellation and that unilateral
cancellation saves the time, energy and resources consumed by waiting for court disposition. The
law has expressly stipulated these cases, as they are exceptions after all. They are stated below.
a) Essential date of performance: - This describes the circumstance whereby the

performance of the contract on a stipulated date is so essential that failure of
performance on such date renders the contract to that party useless as there is no
opportunity for making second performance. Consider, for instance, that A and B
concluded a contract for rental of car for a wedding. If B fails to provide the car
on the wedding day, then performance will no more be important for A because
the wedding day is an essential date of performance for him, which has already
passed.
b) Expiry of time limit: - This entitles a party to unilaterally cancel a contract where
a fixed, rigid time for performance has been specified and performance has not
taken place within this time. Three situations may be identified here. One is
expiry of a contractually fixed compulsory date of performance. The second
pertains to the failure to make performance despite the sending of a default notice
specifying a final time-limit for performance. The third and the last is about the
lapse of time limit fixed in the grace period that is granted by the creditor or by
the court. The expiry of all these time stipulations entitles the creditor to cancel
the contract himself without the need to go to the court for same.
c) Anticipatory breach: - This happens where the defaulting party unequivocally

declares to the other party that he will not perform the contract. A refusal
communicated to the other party in writing entitles such party to declare the
unilateral cancellation of the contract even if the communication is made before
the arrival of the due date of the obligation. This is an alternative available to the
creditor; he can use other remedies (forced performance) instead if he wants.
d) Impossibility of performance: - It refers to the situation where a specific subject

matter that was essential to the performance of the contract has perished. The
impossibility that is relevant here is subsequent impossibility; original
impossibility is excluded because a contract with an impossible object is void in
the first place.
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3.4.2.3. Damages
Dear student, we have said that an aggrieved party can claim the alterative remedies of forced
performance and cancellation in the event of non-performance of contractual obligations. But it
does not stop there. There are likely damages sustained by a party because of the failure to
discharge the contract by the other party. Damages may be due whether or not the other remedies
are claimed. Thus, damages may be awarded even along with a claim for specific performance.
a) Nature of Contractual Damages
Contractual damages are characterized by the absence of a fault requirement. That means, the
plaintiff is not expected to prove the fault of the defendant in order to obtain damages and the
defendant cannot exculpate him/herself by establishing his faultlessness. This is different from
the nature of tortuous damages which are fault-based as a rule.
However, the defendant is entitled to assert the defense of force majeure if the non-performance
is the result of force majeure, the party will be released from the payment of compensation for the
resulting damage. Force majeure is a circumstance that is unforeseen and makes performance
absolutely impossible. Unforeseeability and absolute impossibility are cumulative preconditions
for the existence of force majeure, and the absence of one denies the failing party to claim the
defense. The law makes an illustrative list of cases of force majeure. It includes the enactment of
a law that prohibits the implementation of the contract; a natural catastrophe such as earthquakes,
thunder and floods; on outbreak of international or civil war; or the debtor’s death or unexpected
serious accident or illness. On the other hand, cases that can never constitute defense of force
majeure include strike or lockout occurring in the debtor’s factory, an increase or decrease in the
price of raw materials necessary for the performance of the contract, or the passing of new law
which makes the debtor’s obligation more onerous.
The fault of the debtor may be exceptionally taken into account. The law recognizes two cases
where damages are due only when fault is established. One is when the contract relates to
obligations of means, in which the debtor undertakes to do his best to achieve a result without
guaranteeing the result. If the debtor in good faith has done the best within his competence and
capacity, he is not the one to blame for the failure to achieve the end because failure is in the
nature of the contract itself. Such contracts as those concerned with lawyer-client and physician-
patient relationships create obligations of means. As such, the lawyer tries his best to win a case
and not guarantee to win it, and the doctor does his best to cure the patient but not certain to cure
him/her. Thus, the failure to achieve the winning or the curing as the case may be does not result
in the award of damages unless fault is proved. The second scenario is about gratuitous contracts
– contracts made for the exclusive advantage of one party, or contracts which create unilateral
obligation. Contracts of donation and deposit are good examples. In such contracts, the debtor is
free from the payment of damages of non-performance unless he commits fault. The exclusion of
damages in these cases reveals that the party who is not benefiting from the contract in the first
place should not be further penalized by the payment of compensation for damages resulting from
non-performance without his fault. The degree of fault that needs to be established is not even
ordinary; it should be a grave fault. Of course, what constitutes grave fault is subject to the
appreciation by the judiciary of the circumstances of the case
b) Extent of Damages
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The amount of damages that is payable for contractual non-performance is equal to the normal
damages that is expected to result from the non-performance. The court fixes, as a rule, this
amount having regard to all the circumstances surrounding the non-performance without the need
to ascertain the actual damage sustained by the creditor. The amount of this presumed normal
damage may be less than or could exceed the actual damage. The court awards such an amount
unless the contrary is proved by the parties.
The amount of the normal damages that is to be awarded by the court in the normal course of
things may be increased to the actual if it is less or reduced to the actual if it is proved to be
higher. The party, normally the creditor, can claim the increase of damages by proving that the
damage he actually sustained is greeter. Conversely, the other contracting party, normally the
debtor, can seek the reduction of the normal damages by establishing that the actual damage is far
less. Generally, the court awards damages in the amount normally presumed to occur, but this
amount may be decreased or increased if it is proved by the parties that the actual damages
caused by the non-performance is less or greater than the normal damages as the case may be.
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Self-Check Questions
1. Why is capacity required in the formation of contracts?

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2. Discuss the difference in the effect of fraud by a third party and duress by a third party in
the invalidation of a contract.
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3. Explain by taking two examples why some agreements are not contracts.
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4. What is the difference between implied acceptance and silence?

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5. Why do you think is the damages that result from the invalidation of a contract because
of mistake to be made good while those resulting from invalidation because of fraud not?
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6. Spell out the circumstance in which reverential fear may operate as a legitimate ground to
invalidate a contract.
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7. Why is illegal motive not regarded as a ground that nullifies a contract?

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8. Cite an immoral business transaction, yet not illegal, and explain its effect on the contract
created.
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9. How are the problems of sticking to formality requirements and the danger of absence of
formalism reconciled? What is the position of the Ethiopian law on the question of
contractual formality?
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10. Identify the basic constituents of performance of contracts.

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11. How is partial performance dealt with under the law?

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12. What is the importance of special interest of the creditor in awarding specific
performance?
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13. Why is cancellation of a contract as a rule to be declared by the court?

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14. Discuss the essence of contractual damages.

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15. Jemal sent invitations to a number of potential buyers to submit bids for some timber he
wanted to sell. Two bids were received as a result; the higher bid was submitted by Nuru.
Jemal changed his mind about selling the timber, however, and did not accept Nuru’s bid.
Nuru claimed that a contract for sale existed and sued Jemal for breach. Did a contract
exist? Discuss.
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16. Godana contracts to lease a service station for ten years. His principal income is from the
sale of gasoline. Because of an oil embargo by foreign oil-producing nations, gasoline is
rationed, cutting sharply into Godana’s gasoline sales. He cannot make his lease
payments. Discuss if the lease contract can be cancelled because of impossibility of
performance.
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CHAPTER FOUR
LAW OF AGENCY
4.1. General
An agency relationship exists when one party, called the agent, agrees to represent or act for
another party, called the principal. The principal has the right to control the agent’s conduct in
matters entrusted to the agent. An agency may be engaged to accomplish a single task or to carry
out several tasks.
Agency relationships permeate every aspect of modern economic life. By using agents, the
principal can conduct multiple business operations simultaneously in various locations. As
obviously human beings cannot be physically available at different places at the same time, a
person having the intent of doing business transactions at multiple places (and that is very
important in modern fast paced world of commerce) is helped by agency undertakings to fill-in
the gap created by the natural time and space constraints. Thus, for example, contracts that bind
the principal can be made at different places with different persons at the same time. A familiar
example of an agent is a corporate officer who serves in a representative capacity for the owners
of the corporate entity. In this capacity, the officer has the authority to bind the principal (the
corporate/juridical entity) to a contract. Indeed, agency law is essential to the existence and
operation of a corporate life, because only through its agents can a corporation function and enter
into contracts.
Agency is the fiduciary relation that exists between two persons so that one shall act on the
behalf and subject to the control of the other. The term fiduciary is at the heart of agency law. It
can be used both as a noun and as an adjective. When used as a noun, it refers to a person having
a duty created by his undertaking to act primarily for another’s benefit in matters connected with
the undertaking. When used as an adjective, as in “fiduciary relationship”, it means that the
relationship is one involving trust and confidence.
In a principal-agent relationship, a legal bond will be created between the parties so that the agent
will act on behalf and in stead of the principal in negotiating and transacting business with third
parties. An agent becomes empowered to perform legal acts that are binding on the principal and
can bind a principal in a contract with a third person. For instance, if A is hired as a booking
agent for a certain music band, A can negotiate and sign a contract for the band to appear at
concerts. The contract will be binding and thus legally enforceable against the group. The
authority given to an agent under Ethiopian law is termed as the power of attorney (Art.2179,
Civ. C).
While agency is the fiduciary civil relationship between the principal and the agent, its primary
purpose is to confer on the agent the authority to transact with third parties. Thus, we would have
two categories of relationships in agency undertakings: one is the initial, or the internal,
relationship between the agent and the principal, and the other is the subsequent, or the external,
relationship between the agent and third parties. These two categories of relationships are
separate and exist in their own right, even though the second relationship somehow depends on
the first so as to produce the normal effect of agency.
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4.2. Sources of Agency

The sources of agency under Ethiopian civil law are two: the law and contract. Even though the
origin may be different, it is ultimately sanctioned by the rules of law and produces effect at law.
In the majority of cases, agency undertakings originate from contracts. So, our focus in this
chapter is contractual agency. However, it is important to make enumerations of agency
relationships arising from the law.
4.2.1. Agency by Operation of the Law
The law intervenes, in the absence of formal agreement between parties, in certain cases for
reasons of public policy and to fill-in the gap created by the difficulty, and sometimes even the
undesirability, of securing consent. There could also be various specific reasons attributable to
particular cases of agency created in this way. The Ethiopian law also recognizes agency by the
operation of the law in certain circumstances.
One instance where agency arising from the law operates is representation of persons with legal
incapacity. As you may remember from your discussion in chapter two, incapable persons such as
minors, judicially interdicted persons and legally interdicted persons cannot perform juridical acts
by themselves. They exercise their rights and duties only through guardians and/or tutors. The
law obliges the court to appoint a guardian and/or a tutor for these kinds of persons. The guardian
and/or the tutor act on the behalf of incapable person not because of prior agreement but because
the law has given them the authority to do so.
An agency also arises by law in cohabitation, i.e. it may occur in family relationships, as between
husband and wife. For example, suppose one spouse purchases certain basic necessities and
charges them to the other spouse's charge account. The law often regards the latter as liable for
payment of the necessaries, either because of a social policy of promoting the general welfare of
the spouse or because of a legal duty to supply necessaries to family members.
Agency by operation of law may also occur in emergency situations. The law encourages the
curbing of an emergency by recognizing persons who have no agency authority to contract with
others to act on the behalf of other persons anyway due to the emergency. For example, a rail-
road engineer may contract on behalf of his employer for medical care for an injured motorist hit
by the train. Such a situation is referred to in Ethiopian law as unauthorized agency, which we
will deal with later on.
In some situations, a court may also out of its discretion appoint an agent, called the curator, to
act on the behalf of another. The court grants an authority of agency where a person cannot
himself appoint an agent for reason of being away or ill, and it must make the authorization in a
manner that protects the interest of the principal.
4.2.2. Contracts
Like we cited above, the vast majority of agency relationships have their creation in contracts, i.e.
agreements between the agent and the principal. The preliminary relationship is contractual in
55
nature, and the parties to such contract can define the scope of the authority of the agent and are
free to determine the details of their engagement. Since the right to properly is one of the
fundamental individual rights and since agency has the effect of handing over this individual right
to another person, it is normally expected that the person himself authorizes another and he
himself has to decide on his economic fate to entrust the running of some (or all) of his
proprietary rights to another person.
4.3. Contractual Agency in Ethiopian Law
4.3.1. Definition and Formation
Agency is defined, under Article 2199 of the Ethiopian Civil Code, as a contract whereby a
person, the agent, agrees with another person, the principal, to represent him and to perform on
his behalf one or several legally binding acts. Agency in this sense is special type of contract to
which the fundamental rules of contract law should apply. The essential requirements for the
formation of any contract need to be observed in the conclusion of a contract of agency too.
Such essential requisites as capacity, consent, object and formality must be fulfilled in order to
create a legally valid agency contract. The parties, both the agent and the principal, must be
capable of contracting. Thus minors, judicially and legally interdicted persons cannot be parties to
a contract of agency. As it is a juridical act, capacity is required. But this is to be distinguished
from the case where the law appoints agents for these incapable persons. In this case, the
incapable persons occupy the position of principal, but that position has not arisen from a
contract.
As a contractual engagement, agency cannot stand without the fulfillment of free and legal
consent. Consent is the pillar of contracts, and it needs to be manifested when entering into the
contract of agency. Object of the contract should be sufficiently defined, should be possible,
lawful and moral. The purpose for which the principal grants an authorization to the agent should
be stated with sufficient clarity; that same purpose must be possible to execute. It must not be
something that contravenes the law and morality.
A contract of agency should also comply with formality requirement if there is any such requisite
prescribed by the law. Form is not an absolute legal requisite; it is to be complied with only when
the law stipulates a specific formality. For example, the law states that preliminary contracts are
concluded in the same form as the main contract. Most agency contracts are preliminary
contracts, as they are dictated by the formality the main contract adopts. For instance, suppose A
authorizes B to conclude an insurance contract, and the law demands contact of insurance to be
made in writing. The preliminary contract (the agency authorization) should be made in the form
(writing) of the main contract (insurance).
The contract of agency, just like many other contracts, can be formed either expressly or
implicitly. The express manifestations of agency could be written or verbal communications. The
implied mechanisms of creating agency contracts are usually signs and conduct. But, all these
mechanisms must clearly show the pure and simple conformity of acceptance with offer. Silence
does not amount to acceptance, and cannot be relied upon to result in a valid contract. In
conclusion, a contract of agency may emerge in whatever way in so far as there is no doubt as to
the formation of the contract by custom, equity or other prevailing value.
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4.3.2. Scope and Types of Authority
The extent of the powers of the agent in explicit authorization is rarely difficult to tell, because
the express enumerations themselves are able to display the limits of the agency authorization.
But a problem of determining the scope of authority of the agent may arise where the power is
given implicitly. In any case, the law has tried to fill-in the gaps created by the contract giving
rise to the power of attorney of the agent by providing for two mechanisms that contain matters
given to the agent. The two ways of agency authorization are general and special agency.
It may be the case that the power of attorney is fixed in general terms, without detailed
authorization. This is called a general agency. This may pose a problem as to what powers should
the agent exercise. The law states that agency expressed in general terms only confers upon the
agent authority to perform acts of management. Once again it looks that the law has attached a
great value to the proprietary interests of a person to as far as possible be deemed run by the
person himself. The law does not boldly allow general agency authorizations to be interpreted in a
manner that gives power to the agent to perform acts that alter the patrimonial status of the
would-be represented. Thus, the law, demanding explicit assignment in cases that affect the
economic position of the principal, limits agency powers expressed in generic terms to the
performance of acts of management.
Acts of management are by nature, as legally understood, not directed at the alteration of the
proprietary position of the principal. They are merely administrative or else maintenance
functions that aim to continue the previous economic status quo of the principal. A person with
authorization in general agency terms discharges only preservatory functions and is empowered
only to sustain the rights of the principal; he is not authorized to exercise acts of disposing of the
rights of the principal. Hence, such agents have a limited power less disposing the represented
person’s rights.
The law enumerates, in article 2204 of the Civil Code, acts of management as comprising the
collection of debts, the discharge of debts, investment of income, leases for terms not exceeding
three years, and any other acts done for the preservation or maintenance of property. These acts
are taken as preservatory acts, and are more or less concerned with the continuity of the rights of
the principal and not alienating them. There is also a category of functions exercised by the agent
regarded by the law to fall in acts of management. These are the sale of crops, the sale of goods
intended to be sold, and the sale of perishable commodities. These latter acts are acts of
disposition; but a close look at these activities reveals that the purpose of conferring power to
conduct them on an agent is to prevent the loss of the rights of the person represented. The
economic rationale behind these matters shows that they would be sold anyway even by the
principal either because they don't persist longer retaining their quality or are already destined for
disposition (such as trading stock). Thus, there is no purpose served by waiting for express
authorization, and general agency suffices as it effectively saves rights on such commodities from
being lost.
On the other hand, acts other than those of management which alter the legal position of the
principal need a special authorization. Acts of disposition thus need to be particularly provided by
principal. The agent is recognized as empowered to perform acts of alienating the proprietary
affairs of the principal only if the principal has specially enumerated them in the document
evidencing power of attorney. Otherwise, the power cannot be presumed by the law.
Special agency confers on the agent authority only to conduct the affairs specified by the contract
of agency, and of course their natural consequences attached to the specifically enumerated acts
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by usage or custom (Art.2206(1)). The fact that acts of disposition presuppose express stipulation
does not mean that the unstated but intrinsically associated activities therewith are excluded. The
law rightly includes the inevitable incidental functions that are not even necessary to be specified
in the scope of authority of a special agent.
Article 2205(1) of the Civil Code makes an illustrative list of activities that require special
authorization for their discharge. These include alienation or mortgage of real estate, investment
of capital, signing of bills of exchange, effecting settlement and consenting to arbitration, making
donations, and bringing or defending lawsuits. Dear students, you may easily get that, for
example, the sale or the setting for mortgage (such as to borrow huge money) of an immovable
property seriously affects the proprietary interests of the principal. Investment of capital is
likewise, as opposed to investment of income, entails a risk of losing the principal's wealth
earmarked as venture capital for expanding business affairs. Investment of income refers merely
to maintaining that income as it is (such as by depositing it with a bank). Settlement, arbitration,
bringing or defending lawsuits all implicate the disposing of the rights of the principal. They all
carry with them an aspect of surrendering the patrimonial interest of the principal. Again, the
authority to sign bills of exchange represents an important proprietary right. Bills of exchange are
simple contracts that easily transfer the money belonging to the principal to another. All the
above cases clearly tell the possibility for the reduction, or even increase, of the patrimony of the
principal. Patrimony stands for the sum total of all assets and liabilities of the principal, and any
such acts as the above that alter the patrimony are to be specifically given to the agent. Otherwise,
or failing express enumeration, they are deemed not given to the agent and the contract of agency
is interpreted to exclude these transactions.
We may identify agency relationships having regard to the type of authority the agent acts with.
By type, we are not referring to the content of the authorization (which we have just seen above),
but to the external manifestation of the authority. In a sense, we can categorize authority into:
actual authority and apparent authority. Actual authority produces the normal effects of agency
relationship which we will see shortly. Apparent authority may also give rise to such effects but
only circumstantially. Actual authority is an authority which the agent has factually been granted
under the contract reached between the principal and the agent or by virtue of subsequent
ratification by the principal. Both express and implied authorizations constitute actual authority.
Apparent authority, on the other hand, is not an authority arising from the consent of the principal
whether express or implicit. This authority does not exist in reality, but it arises as a matter of law
out of the presumed position of the parties in the eyes of third parties and these third parties
assume that the agent has authority to act on the behalf of the principal. The scenario of apparent
authority (where there is no authority at all in reality) must, therefore, be distinguished from
implied authority (where authority indeed exists).
Agency authorizations may also be divided from the view point of the knowledge by third parties
of the situation. In this sense, we can have disclosed and undisclosed agency relationships.
Disclosed agency is a relationship whereby both the identity of the principal and the
authorizations he has conferred on the agent are known to third parties. Undisclosed agency on its
part refers to the situation where the agent acts with third parties without disclosing to third
parties both the fact that he is an agent and the person he has represented. An internal relationship
(the actual authorization) between the principal and the agent exists, but externally third parties
believe that the agent is acting on his own behalf. There is a difference in the effects of these sorts
of agency relationships especially as regards relation with third parties, and we now look into the
effects of each of such agency engagements.
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4.4. Effects of Agency

As a juristic act involving multiple relationships, agency undertakings produce various distinct
legal effects. The effect regarding liability relationships among the various parties involved in
agency vary depending on the sorts of authorization we have tried to highlight just above. It is
also equally breathtaking to consider the right-duty correlation between the principal and the
agent.
4.4.1. Liability Relationships
Complete agency that produces conventional effects between the principal and third party is the
one that comes about in actual authority and disclosed agency. In actual authority-disclosed
agency scenario, a direct legal bond is created between the principal and third parties. The agent
functioning under such a circumstance merely facilitates the transactions and does not personally
enjoy rights or bear duties arising from the transaction he has undertaken with third parties. He
simply steps out of the legal bond, and it is the third party and the principal who are personally
indebted to each other. Neither the third party nor the principal can make a personal claim against
the agent regarding the transactions created. The agent is not answerable for the performance of
the contract he has concluded with third parties, and it is the principal and third party that are
legally obliged to one another for the performance of the obligation.
In an undisclosed agency scenario, the agent is deemed to have acted on his own behalf and legal
bond in this case is created between the third party and the agent. The agent is authorized to
represent the principal, but third parties do not know the fact that he is an agent. So, the law
recognizes a liability relationship between the agent and third party. However, the internal
liability relationship the agent has with the principal remains intact. Thus, the agent recovers
duties he has personally borne vis-à-vis third parties through his rights from the principal, and he
discharges the rights he has personally enjoyed vis-à-vis third parties through his duties from the
principal. The principal and the third party cannot personally claim from each other, but they can
claim from each other, through subrogation, the rights and duties they each possess vis-à-vis the
agent by replacing themselves to the positions of the agent. They exercise against each other not
the rights they personally have with regard to each other but those of the agent.
In some instances, conflict of interest may arise between the principal and the agent, the agent of
interest may arise between the principal and the agent. The agent is deemed to undertake
transactions in the exclusive interest of the principal. Thus, in case his representative capacity
comes into conflict with his personal interest and the latter prevails, the agent is personally liable
towards third parties irrespective of whether the agency is a disclosed one. The principal would
be legally obliged to assume only those obligations created in his own interest. The agent may
even contract with himself, he may contract with the principal by using his representative
capacity of the principal and his own personal capacity. Here, it seems that the only party is the
agent, but he stands for two capacities (personal capacity and representative capacity) and thus a
contract may be legitimately said to have formed between the principal and the agent himself in
his personal capacity. So, if there is any conflict of interest evident in this kind of transaction, the
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principal will not be bound. But, if the agent created such a relationship without prejudicing the
interest of the principal, he may bind the principal.
Let's finally see the liability relationship that underlies transacting in apparent authority.
Transactions undertaken in apparent authority may or may not create a direct legal bond between
the principal and the third party depending on circumstances. The agent who acts in apparent
authority is always personally liable to third parties with whom he transacted. The question here
is thus how to make the principal liable to third parties in addition to the agent and when to
exculpate principal.
The principle is that where an agent acts with apparent authority (such as where he undertakes
with lapsed or revoked authority, or else where he acts exceeding the authority he is given), the
principal will not be liable and only the agent is held liable to third parties. But, exceptionally the
principal is held liable together with the agent in the following cases, as provided in Art. 2195 of
the Ethiopian Civil Code.
- Where the principal has informed a third party of the existence of the power of attorney
but failed to inform him of the subsequent partial or total revocation of such power;
(The principal has to notify third parties about the revocation of the authority of the agent
just as he notified them of existence of the authority. Otherwise, he is deemed to be in
bad faith and his default makes him liable.)
- where the principal failed to demand the return of a document evidencing power of
attorney, if any;
(If the authorization is supposed by a document evidencing same, which is mostly the
case, the principal has to take the document from the hands of the agent or he has to
legally claim the return in case the agent refuses. If the principal fails to do so, he will be
bound by the acts the agent makes.)
- Where the statements or behavior of the principal has made third parties believe in the
existence of authority.
(If third parties justifiably rely upon the statements or conduct of the principal, the
principal will be liable towards third parties for the acts the agent performs in apparent
authority.)
These three cases are circumstances where the principal assumes joint and several liability
together with the agent towards third parties. When we say that the principal and the agent are
jointly and severally liable towards third parties, we mean that the third party would have a full
recourse either against one of these parties (principal or agent) individually or against both of
them jointly. Thus, while the agent is always liable to third parties whenever he acts with
apparent authority, the principal joins him in bearing such liability only in the above exceptional
cases.
However, the principal may exempt the agent from liability through the ratification of the agent’s
actions in apparent authority. Where the principal ratifies (approves) acts that the agent performs
in apparent authority, whether such acts entail the joint and several liability of the principal and
the agent or the personal liability of the agent only, the agent is relieved from liability whatsoever
and the principal assumes complete liability. In other words, ratification has the effect of
assimilating the liability of the principal to the normal liability that results from the combined
consideration of actual authority/disclosed agency scenarios. The whole transaction thus creates a
direct legal relationship between the third party and the principal. But in cases other than those
making the principal jointly and severally liable with the agent, the principal has the option of
repudiation. Repudiation refers to the power of the principal to reject (disapprove) acts that the
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agent performs in apparent authority where the principal cannot be held liable, and this has the
effect of making the agent bear the whole liability towards the third party.
4.2.2. Duties of the Parties to the contract of Agency
This section is devoted to the internal (preliminary) relationship between the principal and the
agent. There are respective rights and duties as between these parties. Rights and duties are
correlates, and there cannot exist a right without a corresponding duty. Thus, rights of the
principal carry duties of the agent and rights of the agent carry duties of the principal. This means
that when we discuss duties of the agent, we are discussing the corresponding rights of the
principal, and that when we are discussing the duties of the principal, we are discussing the rights
of the agent. We thus deliberate briefly only on the duties of the agent and duties of the principal
in that order.
4.4.2.1. Duties of the Agent
Duties of the agent arise from the contractual stipulation made by the parties and from the
fiduciary nature of agency undertakings that come into existence as a consequence of the law’s
role to fill the gaps created by the contract.
a) Duty of notification: - It is a maxim in agency law that all that the agent knows, the principal
knows. Thus, it is only logical that the agent be required to notify the principal of all matters that
come to his attention concerning the subject matter of the agency. What the agent actually tells
the principal is not relevant; what the agent should have told the principal is crucial. Under the
law of agency, notice to the agent is notice to the principal, and the agent should observe this
duty.
b) Duty of Loyalty: - This is known in Ethiopian law as the duty to undertake authorization with
utmost good faith. The requirement of good faith is the pillar of civil law and it refers to the
agent’s exercise of authority in the exclusive interest of the principal. Loyalty is the
manifestation of this requirement. Basically stated, the agent has the duty to act solely for the
benefit of his principal and not in his own interest or a third party. For example, an agent cannot
represent two principals in the same transaction unless both know of the dual capacity and
consent to. This duty also means that any information or knowledge, even that resulting in
revocation of authority, acquired through the agency relationship be communicated to the
principal and considered confidential as regards third parties. In short, the agent’s loyalty must be
undivided. The agent’s actions must be strictly for the benefit of the principal and must not result
in any secret profit for the agent.
c) Duty of obedience and Diligence: - When an agent is acting on behalf of the principal, a duty
is imposed on that agent to follow all lawful and clearly stated instructions dictated by the
principal. Any deviation from such instructions is a violation of the duty of obedience. In
emergency situations, however, when the principal cannot be consulted, the agent may deviate
from instructions without strictly violating the duty of obedience if the circumstances so warrant.
Whenever instructions are not clearly stated, the agent can fulfill the duty of obedience by acting
in good faith and in a manner reasonable under the circumstances.
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Diligence refers to the care and skill expected of the agent. The agent must show a good deal of
care and skill in executing his agency functions. The standard of diligence required here is that
the agent must show no less care and skill towards the affairs of the principal than he does to his
own interests/affairs. He is required to carry out all acts that a good father performs for his
family.
d) Duty of Accounting: - Unless an agent and a principal agree otherwise, the agent has the duty
to keep and make available to the principal an account of all property and money received and
paid out on behalf of the principal. The agent has a duty to maintain separate accounts for the
principal’s funds and for the agent’s personal funds, and no intermingling of these accounts is
allowed.
e) Duty of Non-delegation:- The fiduciary nature of agency relationship is all about placing
personal trust and confidence in somebody the principal appoints as an agent. This very trust is
derogated from when the agent delegates his authority to someone else the principal did not
consent to. The principal authorizes an agent so that the latter discharges functions personally.
This accords with the maxim “a delegate cannot delegate”, meaning the agent himself is a
delegate and cannot further delegate authority over which he has no absolute power.
But, the principal may authorize the agent to appoint a sub-agent. in this case, the duty the agent
is expected to show to the principal is the reasonable selection of the sub-agent. The agent may
also be allowed to delegate by law another in place of him when it is of no difference whether the
act is done by the agent himself or by a third person and when this is implied from usage or
custom of the place of performance, or where the agent is unable to perform the order himself
because of unforeseeable circumstances and the agent is unable to inform the principal of this
case. This is generally directed at the protection of the principal’s interest where the agent can no
more discharge his agency functions for reasons beyond his control.
4.4.2.2. Duties of the Principal
a) Remuneration: - This duty is about the payment made to the agent for his services. But
remuneration is not a requisite; the law even says that agency services are gratuitously made
unless remuneration is expressly agreed upon by the parties. The duty of remuneration thus
comes into the scene under Ethiopian law where the parties expressly stipulate in their contract.
The duty to pay remuneration is exceptionally demanded when the agency services are
professional or where it is customary to pay remuneration for the concerned agency services. But
even in these latter cases, parties can expressly exclude the payment of remuneration.
b) Duty to Advance Money: - The agent perhaps needs money to run the representation of the
principal. According to article 2221 of the Civil Code, the principal shall advance to the agent the
sums necessary for carrying out the agency. This would constitute all expenses that the agent
needs to make in the discharge of his functions including transportation costs and the principal is
expected to forward these outlays in advance.
c) Duty of reimbursement:- Whenever an agent disburses sums of money at the request of the
principal, and whenever the agent disburses sums of money to pay for necessary expenses in the
course of a reasonable performance of his agency duties, the principal has a duty to reimburse the
agent for those payments. Agents cannot recover for expenses incurred by their own misconduct
or negligence, however.
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d) Duty of Indemnification and Compensation: - Subject to the terms of the agency agreement,
the principal has the duty to indemnify an agent for liabilities incurred because of authorized and
lawful acts and transactions. For example, if the agent, on the principal’s behalf, forms a contract
with a third party and the principal fails to perform the contract, the third party may sue the agent
for damages. In this situation, the principal is obligated to compensate the agent for any costs
incurred by the agent as a result of the principal’s failure to perform the contract. The principal
shall also compensate for any non-contractual damages sustained by the agent in the course of
performing his agency duties.
e) Agent’s Lien right:- As the principal is duty bound to discharge all the above functions to the
agent, the agent is entitled to hold as a security any property belonging to the principal that comes
into his possession in executing his functions until the principal makes the necessary payments.
Lien right is a security right that the agent has over the movable property belonging to the
principal in order to force the latter to discharge his own obligations or to ultimately acquire that
property in replacement for the expenses the agent has incurred.
4.5. Special Agency Relationships

Dear student, in this section you will be introduced with certain particular types of agency
relationships within the ambit of the generality we have considered so far. Let’s see them as
recognized by the law.
4.5.1. Commission Agency
Commission agency is a professional agency service that is undertaken for the payment usually
known as a commission. It is an agency widely accepted and practiced in the world of commerce,
and for particular affairs. The Ethiopian law of agency recognizes three types of commission
agents: commission to buy and to sell, Del credere agency, and forwarding agency.
i) Commission to buy or to sell
This is a special type of agency relationship where the agent, called the commission agent, is
empowered to discharge functions of selling or purchasing goods. Such agency confers upon the
commission agent the power to buy or sell goods in his own name but on the behalf of the
principal (Art 2243(1), Civil Code). The agent enters into the sale and purchase transactions in his
own name, yet it is professionally known that he acts not on his own behalf but representing the
principal. Thus, the fact that the name of the principal is not disclosed to third parties does not
change the liability relationship, unlike in undisclosed agency situations we have seen previously.
The agent is a professional, and for that matter, a trader under the Ethiopian Commercial Code;
therefore, the “name test” of the principal is unimportant here.
The commission agent enters only into sales and purchase transactions with third parties. He
only sells goods of the principal or buys goods for the principal. The “goods” he can sell or buy
are ordinary corporeal movables whose ownership can be transferred upon delivery under a
simple sales contract. This will be made clear in the next chapter on law of sales. The sale and
purchase power is not limited to ‘goods’, it also includes securities (such as shares) and other
fungible things. The commission agent can be both an individual agent and an incorporated body.
That means even juridical persons can be commission agents. Generally, subject to the specific
provisions applying to such an agency relationship, commission agency is governed by the
general rules of agency regarding, for example, rights and duties of parties and all other aspects.
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ii) Del credere Agency
This is a special type of commission agency where the agent with the power to buy or to sell is
obligated to provide guarantee for the performance of the transaction he has entered with third
pasties. As a matter of principle, it is presumed that the agent does not guarantee the performance
of the juridical acts he has created, and he will simply step out of the legal bond by leaving the
performance of the transactions to the principal. However, it is possible to bind oneself by
holding oneself as a surety for the performance of obligations. A commission agent who
guarantees the performance of sale and purchase obligations he has created with third parties in
called a Del credere agent.
iii) Forwarding Agent
Forwarding agency is a contract of agency whereby the agent, called the commission agent,
shipper or carrier, undertakes to enter in his own name but on behalf of another person, called the
principal, into a contract for the forwarding of goods. These agents are professional business
runners that, subject to payment of commission, forward goods or transport them. For example,
shipping lines act as agents on the behalf of the parties to deliver goods.
4.5.2. Unauthorized Agency
Unauthorized agency occurs in necessity situations where unexpected situations affecting the
economic interest of a person happen. It is emergency cases that justify such kind of agency.
Article 2257 of the Ethiopian Civil Code states that unauthorized agency occurs where a person
who has no authority to do so undertakes with full knowledge of the facts to manage another
person’s affairs without having been appointed an agent. The representing person has no
contractual authority to act on the behalf of the represented person, but he is legally authorized to
do so because the economic interest of the principal (who is not in a position to take care of his
business) is under a risk. Unauthorized agency is fully recognized by the law only if there is no
means of securing authorization from the principal.
The agent indulging himself in such an activity is obliged to perform acts in good faith and in
strict compliance with the interests of the principal. If he discharges agency functions in the
interest of the principal and has acted with due care and diligence, the effects of a normal agency
relationship (as if the principal has made the authorization) would be operative and the respective
rules of agency would apply. Thus, the agent will step out after making the necessary transactions
and the principal is bound by the acts of the agent to third parties. The principal has a duty to
ratify (approve) the activities of the agent in this case. Where the agent undertakes his agency
functions in accordance with the principal’s interests though without authority, ratification is not
even an option to the principal and he is obliged to ratify. However, if the unauthorized agent
fails to discharge the powers he has assumed in necessity situations in the interest of the principal,
the latter is not obliged to ratify and he can indeed reject the agent’s acts. In such case, the agent
will be extra-contractually liable both to the principal and third parties.
4.6. Termination of Agency Relationship
Agency is not a relationship of eternity. Just like all other juridical acts, its extinction is far from
argument. There are various factors that may operate as grounds for the extinguishment of agency
relationships. Agency may terminate either by operation of the law or the actions of the parties.
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4.6.1. Termination by Law
Where there is no agreement to the contrary, the death or declaration of absence or incapacity or
bankruptcy of either the agent or the principal will result in the extinguishment of the legal bond.
Upon death, personality ends for all legal purposes and therefore the agency as a legal affair is
outrightly terminated. Declaration of absence has the effect of death, and therefore kills legal
personality for all legal matters including agency. Declaration of incapacity also puts an end to
agency relationships because, as we repeatedly said, the personal exercise of all juridical acts
requires capacity. Absence of capacity entails absence of a juridical act such as agency.
Bankruptcy on its part impoverishes the economic status of a person. Agency relates to economic
matters and a person with no assets is not worthy of economic transactions.
4.6.2. Termination by the Parties
There is little doubt that the agent and the principal can, by mutually agreeing through contractual
faculty, terminate their agency relationships. They are free to bilaterally agree to part company.
This is an extension of their freedom of contract.
Unique to agency undertakings is, however, the fact that both the principal and the agent can
unilaterally terminate the relationship without suffering comparable risks of further claims from
each other as that evident in other contracts. The principal can any time terminate the agency by
his own discretion, without facing any claim from the agent. In agency, it is only the principal’s
economic affair that is at stake, and so the principal has an absolute power to put an end to the
agency. He won’t face, for example, the claim of damages from the agent for the mere unilateral
termination. The power of the principal to unilaterally put an end to the authority he has given to
the agent is called revocation.
In slightly similar a fashion, the agent can terminate the agency. He is perhaps not deriving any
benefit from the undertaking, and thus the law does not require the agent to maintain the
relationship until the expiry of the agency term. This is renunciation. The agent can renounce his
authority. But the exception here is that the agent bears the duty to indemnify the principal where
the renunciation is detrimental to the principal. Even in this case, the agent, the agent will be
relieved from the duty of indemnification where he cannot continue the agency undertaking
without himself suffering considerable loss.
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Self-check Questions to Chapter Four
1. Why is it said that agency is a “fiduciary” relationship?

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2. What ends does agency serve in modern commerce?

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3. Explain what is meant by apparent authority by giving illustrations.

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4. What are the agent’s rights and remedies against the principal? What are the principal’s
rights and remedies against the agent?
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5. Identify the difference in effect between disclosed agency and undisclosed agency?
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______________________________________________________________________________
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6. “The agent does not incur personal liability even if he acts in apparent authority”. Do you
agree? Explain.
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7. What do you think is the effect of a person’s transacting on the behalf of another after his
agency power is terminated?
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8. How do the principal and the third party claim from each other rights in undisclosed agency
relationship?
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9. First outlining the essence of agency functions under special authorization, enumerate the
activities.
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10. Ato Berihun, who resides abroad, appoints Tadele to undertake the construction of a house
on the land he has got in lease in Bahir Dar. Tadele created a transaction in writing for the
construction with independent contractor Ato Mergia. Tadele has also entered into contract
with Ato Yaregal for guarding the house under construction and the construction materials
pooled on the land. Yet, Tadele concludes all these contracts in his own name and his
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contracting parties do not know he is an agent. Answer the following questions based on the
facts given in the case.
i) Should there be a compliance with a formality requirement in authorizing the
agent? What form, if any?
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ii) Can Tadele bind Berihun by a contract he created with Yaregal?

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___________________________________________________________.
iii) Is Mergia liable to Berihun for the construction of the house? How?
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CHAPTER FIVE
LAW OF SALES
Dear distance student, this chapter deals with another important area of law that you as a potential
businessperson need to acquaint yourself with. It focuses on a crucial type transaction, sale, and
its legal regulation. Thus, at the end of the chapter you must make sure that you have:
- appreciated the basic elements in sale contracts;
- grasped the effect of sale contract;
- identified the identity of a ‘thing’ that is subject-matter for sale;
- explored the concepts of transfer of possession, ownership, and risk;
- gathered rights and duties of parties to sale contract; and
- identified certain cases of like-sale transactions.
5.1. Introduction to Sales Contract and Its Formation

No body of law operates in a vacuum removed from other principles of jurisprudence. A sales
contract is governed by similar civil law principles applicable to all contracts – offer, acceptance,
capacity, performance, legality, etc – and these principles should be reexamined when sales are
studied. In regard to sales contracts, the special rules of sales would have a prior application;
when the special law of sales is silent on a given issue, then the general principles of contract law
will apply.
The objects of a sale contract we will deal with here are ordinary corporeal chattels – tangible
movable goods that can be easily transferred without any further need to register them or the like.
These types of goods are ordinary corporeal chattels in the sense that their ownership is legally
transferred upon mere transfer of possession through delivery. As sale is a medium of transferring
title; our focus here is with objects whose title passes upon delivery. In so far of the sale of
special movables, immovables, and incorporeals is concerned, there is a separate regime of law
regulating same which is, however, beyond the scope of this module.
5.1.1. Meaning and Essential Elements
Sale is an exchange mechanism that has as its essence the passing of title from the seller to the
buyer for a price. Sale is a contract and the Ethiopian Civil Code (Art 2266) defines a contract of
sale as a contract whereby one of the parties, the seller, undertakes to deliver a thing and transfer
its ownership to another party, the buyer, in consideration of a price expressed in money which
the buyer undertakes to pay him. We can gather certain fundamental characteristics that a sales
transaction embodies.
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i) It transfers ownership: - Ownership in economic and legal terms represents the

fullest right a person would have over a property. So, it includes the right not only to
use the thing but also to demolish, abandon, alienate, or donate that thing. Sale gives
a buyer all such powers.
ii) It is an onerous act: - A contract of sale it not a liberality; it is always made for
consideration. Parties engage in a sale transaction to get some benefit each, not
merely to bind themselves to the other parties.
iii) It is a commutative act: - The contract of sale is bilateral – the obligation it entails is
divided between the parties thereto. The obligation of one party is taken up in
consideration of the obligation of the other.
iv) Trading parties and mercantible thing: - It is needed that parties to a contract of sale
are traders in the sense that they are free from insolvency or bankruptcy risks. They
must be worth transacting in commercial terms. Similarly, the thing that is subject
mater of sale must be that within commerce. The thing should be a mercantible one
upon which an exchange through legal sale can be effected. Traditionally, certain
things are outside commerce. At the forefront is the human person; this manifests the
prohibition of slavery or the sale of one’s own organs. You can’t sell your child or
your limbs for that mater.
v) It involves the fixing of a price: - A characteristic of the contract of sale is the price –
the monetary counterpart of the giving over of the good for sale. Incidental to this is
that the price must be labeled in a legal currency, that it must be certain or
ascertainable, and that it must be just – not considerably disproportionate with the
value of the good.
As a final note, one needs to distinguish a sale contract from certain similar types of exchange
modes. Such contract as hiring sale, supplies, barter, donation, transfer of rights other than
ownership, and contract of service should not be confused with sale. There is a difference
between sale proper and the other types exchange transactions.
A contract of sale may be confused with a service contract especially as regards who supplies the
basic ingredients for the manufacture of a thing that is to be delivered. Where the party who
undertakes delivery of corporeal chattels to be manufactured or produced is also to provide the
main materials necessary for the manufacture or production, the transaction is a sale one. But if
the party to whom is delivery to be made provides the essential ingredients for the making of the
thing, the contract is best described as service and not sale. For instance, A wants a full garment.
A brought the pieces of textile by his own and hands them over to a tailor to produce the suit.
This agreement is not one of sale, but service.
Barter is also an onerous contract that is concluded with a view to transfer ownership. But there is
no monetary price in bartering, and the exchange is made between things. Price expressed in
money terms distinguishes sale from barter. Donation on the other hand is a contract of gratuity;
it is not made for consideration. One party undertakes the obligation to transfer ownership of a
thing to another. But sale is a bilateral engagement when it comes to bearing obligations.
The transfer of rights other than ownership such as usufructs (a right to use and enjoy the fruit,
not to alienate) is in essence different from sale. Usufruct is short of the power to alienate or
dispose of a thing, which ownership contains. In sale, ownership is transferred, not merely
usufruct.
A contract may be concluded for hiring a thing. The intention is that the thing will be returned
back to the lessor. The contract may further provide that the tenant of the thing will become the
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owner thereof upon payment of a given number of installments. Such a contract will be
assimilated to a sale contract where the said installments are paid. But the tenant can terminate
the contract by returning the thing to the original owner. A full sale contract does not produce the
effect of returning back the thing. Sale is also different from a contract of supplies, where a party
undertakes for a price to make in favor of the other party periodical or continuous deliveries of
things. This contract relates to the delivery, not to the transfer of ownership of a thing. Price is
paid for making the supply.
There are also certain “forms of sale” recognized by law. They are all forms of sale, but assume
different modes. These include sale on trial, sale by sample, sale with ownership reserved, and
sale with the right of redemption.
Sale by sample refers to the situation where a particular thing is agreed upon to be sold so that it
will also be used to conclude a sale contract in respect of the other category it represents. The
sample or pattern will operate to represent the sale of others. Thus, sale is concluded in respect of
the whole thing when the sample conforms to the description in the contract.
Sale on trial on the other hand is a conditional sale which completes only after the thing is taken
by the prospective buyer and tried to be suitable. If the thing passes the trial, the sale contract
becomes intact. Until the trial is made, ownership resides in the prospective seller and so risk
remains with him.
Sale with ownership reserved is a contract whereby the seller reserves to himself the ownership
until the buyer pays the price of the thing he has taken possession. A sale that transfers ownership
in full is created when the buyer fully pays the price. But until then, the risk is assumed by the
buyer, and the seller may take back the thing.
Finally, there is a type of sale called sale with right of redemption. Right of redemption refers to
the right the seller exercises to buy the thing back. Parties can reach agreement so much so that
the seller can re-buy the thing he has sold within a defined period of time, usually two years,
subject of course to the refund of the appropriate amount of price to the buyer.
Dear distance student, I do hope that you would have a fair understanding of the essence of the
essence of a sale contract and its various manifestations. I also believe that the comparisons made
of contracts akin to sale help you make clear distinctions between sale and these allied contracts.
Anyway, it is hoped that you have by now grasped the essential features of a contract of sale.
Let’s now turn to formation and then performance of sale contracts.
.
5.1.2. Formation of a Sale Contract
As the formative requirements we have considered in the third chapter are compulsory upon the
parties to be observed, they are needless to say applicable on any special contract such as sale.
Those essential requisites stated under Art.1678 of the Ethiopian Civil Code are also upheld here.
Consent of both parties, capacity, object and legal formalities should always be observed when
concluding a sale contract. Consent as manifested through offer and acceptance and which marks
the mutual meeting of minds of the parties must be expressed concerning all aspects of the sale
transaction. As sale is a juridical act, the parties must be capable of contracting. The object of the
sale, the thing to be delivered and the delivery itself, should not merely be lawful and moral but
also be sufficiently defined and possible of performance. As regards form that the contract is to
assume, parties are free to adopt whatever form they desire. They can conclude their contract in
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writing, orally, in signs, or even in conduct, but the form they have agreed to adopt needs to be
observed. If there is, however, a formality requirement particularly imposed by specific sale
contracts, that should be complied with.
The “thing” upon which a sale contract is concluded needs to be the property of the seller. As one
cannot transfer what he does not have, a person cannot sell a thing that does not belong to him.
As sale is a mechanism of passing title, one cannot engage in sale without first having title over
the thing to be sold. Exceptionally, however, it is possible to sell a thing belonging to a third
party, as when as agent is given a special authority to transact sale of things belonging to the
principal. A sale contract normally is concluded in relation to a presently existing thing, that
which is already in existence and ready to be handed over to the buyer during the time of
concluding the contract. All the same, sale may be concluded regarding a future thing, a thing that
is to be manufactured or produced pursuant to the sale contract itself.
We have already said that sale is made for payment of a price expressed in money terms. But
parties may fail to fix the price by themselves, and this by itself does not lead to the annulment of
the contract. Parties may legitimately refer the determination of the price to an external situation
or a third party. An external situation could be the market and the price can be only ascertained
by having regard to that revealed by the market. Certain goods may instantly fluctuate in price at
different places. Parties can have the price ascertained by referring to the price index revealed at a
certain place and time. A third party or arbitrator chosen by the parties can also determine the
price for them. Thus, it is after all these possibilities of determining the price are exhausted that
the contract may be annulled for lack of the essential element of certainly fixed price.
5.2. Performance and Obligations of Parties to Sale Contract
The normal effect of every contract is performance. Sale contract is no exception on this regard.
Performance is realized through the imposition of certain obligations on both the seller and the
buyer. The parties to the contract of sale have their own respective obligations to discharge. Let’s
have a brief look at them.
5.2.1. Obligations of the Seller
The obligations of the seller bears are normally those imposed by the contract itself. The law also
imposes certain obligations of the seller either because of the silence of the contract or due to the
mandatory nature of the obligation. The most noticeable obligations of the seller in a typical sale
transaction are delivery, transferring ownership, providing warranties, and other incidental duties.
a) Obligation to Deliver the Thing
Delivery consists in the factual handing over (the conveying) of the thing to the future owner.
Delivery effectively transfers possession in most cases. The delivery that transfers possession
over the thing can be made in three ways. One is the actual delivery of the thing itself – the thing
is physically handed over to the buyer, i.e. both the corpus and the animus will be transferred to
the future owner. The second mode of delivery is what may be termed as constructive possession,
where the buyer after agreeing to take delivery lets the seller to hold the thing to take it at some
later time. The animus (the intention) is with buyer but the corpus (the physicals of the thing) is
still in the hands of the seller. It shows that the buyer authorizes the seller to take custody of the
thing on his behalf. In this case, the possession of the thing is deemed already passed to the buyer
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and the risk will be borne by him. Thus, constructive delivery also is a mechanism of valid
delivery. The third mode is the handing over of the documents representing the thing. This also
shares some similarity with constructive delivery as the corpus is still in the seller’s hands. Such
is the case when the title deed of the thing is handed over to the buyer. Generally, delivery
doesn’t have to be mere actual/physical delivery of the thing; it also includes the other two cases
where such is made in accordance with the law.
The determination of the quantity of the thing to be delivered is usually made by the parties in
their contract. That quantity is to be complied with, and no delivery is deemed to be valid where it
deviates from the quantity stipulated in the contract. But in certain circumstances, it is impossible
or at least difficult to determine a precise quantity of goods. For instance, the weight or volume
may vary according to time or temperature. Therefore, the seller will only undertake to deliver
only “about a certain quantity”, as expressed in the words of Art 2275(1) of the Ethiopian Civil
Code. The consequence is that it is for the seller to determine the exact quantity to be delivered.
But, the limitation is laid on the seller to prevent him from abusing his position in that a
contractual provision regarding fixing of quantity may be made in the sole interest of the buyer
and that the possible variations between agreed and real quantity is limited to 10% in the case of
the whole cargo of a ship and to 5% only in all other cases.
The time of delivery is also an important aspect of delivery and of course performance. As
always, a clearly stipulated time of delivery in the contract is given effect. But the date of
delivery may not be inferred from the will of the parties. In this case, the law requires the seller to
deliver the thing as soon as the buyer requires him to do so. If there is a contractual stipulation
that delivery is made over a period of time, the privilege of fixing the exact date of delivery
within such range belongs to the seller unless it appears from the circumstances that it is for the
buyer to do so. However, overall, unless provided contractually to the contrary, delivery of the
thing is legally made in simultaneity with payment of the price so much so that the seller is not
obliged to deliver the thing until payment it made. Regarding the place of delivery, the principle,
as in other cases, is that the place of delivery is fixed in the contract. Failing this, delivery is to be
made at the place where the seller had his place of business at the time of the contract or, in the
absence of such, his normal residence. But there are exceptions to this in the case of specific
goods and certain kinds of generic goods. The place of delivery is the location of a thing where
the sale relates to a specific thing and the parties know the place the thing is situated at the time of
the contract. Similarly, delivery regarding sale of fungibles selected from a stock or a specified
supply or that of things to be made or produced in a place known to the parties at the time when
the contract is concluded is effected at such place of the thing.
b) Obligation to Transfer Ownership
This obligation is evident as sale is a mechanism for the transfer of ownership and ownership is
not guaranteed by simple delivery. of course the sale we are taking about right now is that of
ordinary corporeal chattels the transfer of possession of which entails the transfer of ownership.
But that does not suffice, because title may be accompanied by various encumbrances and the
buyer must be helped to enjoy the thing he bought free from any encumbrance.
It is a rule of legal significance that the seller shall take all the necessary steps for transferring to
the buyer unassailable rights over the thing (Art 2287, Civil Code). The proprietary rights of the
buyer may be affected because of third parties’ rights over that thing at the time the sale contract
is concluded. Thus, the buyer may face the risk of dispossession, whether partial or total. The
seller is obliged to warrant the buyer any such dispossession which he might suffer in
consequence of third parties exercising a right they enjoyed at the time of the contract. The
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warranty will take different forms, from the total/partial refund of the price (plus eventual
damages) to the undertaking of settling the situation with the third party.
As sale is a contractual transaction, parties could have an express agreement even regarding
warranty for dispossession. This means that a contractual warranty is given priority. But, there are
legal limits on the giving of such warranty. Thus, where the buyer knows the risk of
dispossession, the seller is not obliged to warrant the thing. But, the law recognizes that the seller
can expressly undertake such warranty contractually. When we come to the contractual exclusion
of warranty, on the other hand, the law suspiciously looks at the situation and imposes certain
compulsory conditions. The law states that contractual provisions excluding or restricting
warranty shall be construed narrowly. The law even totally disallows the contractual exclusion or
restriction of warranty where the seller has intentionally concealed that a third party had a right
on the thing or where dispossession is due to the act of the seller. Any exclusion or restriction in
such cases is of no legal effects.
c) Warranty Against Defects and Non-conformity
A sale contract carries with it a warranty both against defects and non-conformity to the contract.
In pursuance of this, Art.2287 of the Ethiopian Civil Code reads that the seller shall guarantee to
the buyer that the thing sold conforms to the contract and is not affected by defects. What are
defects and non-conformities?
Defects relate to the quality of the thing, and involve the following cases:
- quality unsuitable for normal use or commercial exploitation;
- quality unsuitable for particular use expressly or impliedly provided in the contract;
- deviance from the quality or specification provided expressly or impliedly in the
contract.
The first defect pertains to the unsuitability of the thing for the use normally expected or for a
commercial exploitation reasonably foreseen. This goes without any stipulation in the contract.
Thus, a television must serve audio-visual purposes, a pen must write, etc. The second defect
usually comes about because of a contractually fixed use. Quality for particular purpose may not
necessarily be identical to that of the normal quality. For example, suppose X ordered Y, a baker,
to prepare a cake that serves for wedding. Y makes an ordinary cake. Here the particular purpose
was wedding, but the cake is not cooked in a way serving that purpose. Thus, there is a defect in
the thing. Parties may describe the quality the thing should possess irrespective of its use. This is
the third category of defect recognized by the law. For instance, you wanted Mr. Tekola, a
carpenter, to make a wooden bed for you. The purpose of the bed is quite obvious, i.e. for
sleeping. But you instructed him to do it with the decorations you wanted. Mr. Tekola finalized a
bed with no such decorations at all. There is a clear defect here, and you can legitimately refuse to
take delivery.
Defects could be of two types: patent and latent. Patent defects are obvious defects that can be
noticed too easily. Latent defects are those that are hidden so that they are discovered through
later examination by way of customary usage or expert inspection. The rule of warranty is that for
patent defects let the buyer beware (caveat emptor) and for latent defects let the seller beware
(caveat venditor). If the buyer takes delivery of obviously defective thing, then the risk is his. The
law expects persons to take reasonable care of their affairs. The seller cannot be held liable on a
warranty against defects which are patent that the buyer could overlook them only as a result of
gross negligence. The seller is not liable, for a stronger reason, on a warranty against defects
when it is proved that the buyer knew of the defects. In this case, an express contractual warranty
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given by the seller is of no legal effect. But even in such cases, any provision excluding or
restricting warranty is void where the seller has fraudulently concealed from the buyer the defect
in the thing. The seller is exempted from the warranty if he refrains from engaging in deceptive
conducts. In latent defects, the principle is that warranty is due. But, it is possible to contractually
exclude or restrict the warranty on hidden defects too. The exclusion or restriction, however, does
not produce any legal effect if there is faulty conduct of the seller that conceals the defect.
The buyer will avail himself of warranty for defects only upon compliance of procedural
requirements of examination and notification. He has to undertake customary examination of the
thing at the earliest possible opportunity. Or else he has to have the thing technically examined by
an expertise, such as in a laboratory, etc. The effects of the examination, i.e. the defects and its
nature, must be communicated to the seller. It is upon making of these two cumulative conditions
that the buyer may avail himself of the warranties attached to a sale transaction.
Non-conformity shows a discrepancy between the thing as described in the contract and the
delivered thing in terms of quantity, type, color or other similar characteristics. Non-conformity
resulting from the discrepancy involves partial delivery, or delivery of greater or lesser quantity
than undertaken in the contract to be delivered. Likewise, delivery of a thing different to that
provided in the contract or a thing of a different species is regarded as non-conformity. The
manners of assuming warranty and the scope of such warranty are similar to the case of defects as
we summarized above.
5.2.2. Obligations of the Buyer
The obligations of the buyer are paying the price (the main obligation), taking delivery of the
thing, and other obligation contractually imposed upon him.
a) Obligation to Pay the Price
The obligation is usually discharged quite easily by a cash payment. But as the economy develops
and the importance of commercial transaction rise, more sophisticated means of payment also
appear. For instance, cheques, bank accounts, special banking facilities, credit card payments or
even payment in foreign currencies are modes of paying the price. Art 2304(1) of the Civil Code
reads “the obligation to pay the price shall include the obligation to take any step provided by the
contract or by custom to arrange for or guarantee the payment of price”. In a sense, the buyer
must arrange the actual payment of price and so undertake all the relevant formalities to transfer
the money through orders to the bank. For instance, he is responsible for ensuring that the money
is there on the day of the sale. He must also guarantee payment. The buyer is responsible for an
effective transfer of money to the seller. For instance, he is liable if there is insufficient cash on
his bank account when he drawn a cheque.
The place of payment is in principle that fixed in the contract. Where the contract is silent
payment is made at the address of the seller which implicitly means his business address. In
cases of simultaneity, price is paid at a place where the thing is delivered. Quite in a similar
fashion, time of payment is that stipulated in the contract which could range between payment at
the contract and postponement to a future date such as sale on credit that is realized later than the
delivery of thing. In the absence of a contractual provision, the principle is sale for cash on
delivery. Payment is simultaneous with delivery, but the buyer should be granted the opportunity
to examine the thing for defects or non-conformities so as to avoid a dispute where payment has
taken place and the seller refuses to repair defects.
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b) Duty to Take Delivery
Where the delivery consists in that of a thing conforming to terms of the contract, the buyer
should take it. The buyer has a duty to cooperate in the delivery process and he may not obstruct
the sale by blocking the delivery. The obligation to take delivery includes active performance of
procedures necessary or even customary for carrying out the delivery. He has to cooperate with
the seller, for example, in indicating the color, size or other important attributes of the thing.
5.2.3. Common Obligations of the Parties
The priority is given, like always, to a contractual term that is fixed by the parties. If there is no
agreement, the law imposes certain obligations on both parties based on circumstances. By
common obligations of the parties, we don’t mean that the duty is borne at the same time by both
the seller and the buyer; we rather mean that it is possible for both parties to assume the said
categories of duties having regard to the circumstances of the case. Thus, transfer of risk,
expenses, and preservation of the thing may be borne by either of the parties depending on
differences in time, nature and other attending circumstances.
a) Transfer of Risks
Transfer of risks is not an obligation in and by itself. It is rather a circumstance that determines on
whom certain consequential obligations should fall. Let’s first look in brief how risk passes from
one party to another, usually from the seller to the buyer.
The accepted principle as far as transfer of risk is concerned is the doctrine of res perit domino,
i.e. risk follows title. Stated differently, the transfer of ownership (title) is accompanied by the
transfer of risk. The sale of ordinary corporeal chattels transfers ownership thereof merely
through factual delivery because these goods are those susceptible to the application of the
property law presumption “one who is in possession is deemed to be the owner”. But that is not
all about it, and transfer of risk may occur even where technically transfer of ownership has not
yet taken place or where there is a dispute as to the validity of the sale of the thing.
Risk involves the destroying, perishing, wearing and deterioration of a thing that is subject matter
of the sale transaction. Where the risks are transferred to the buyer, through delivery made in
accordance with the provisions of the contract and of the law, he is obliged to pay the price
notwithstanding that the thing is lost or altered in value (Art.2323 cum 2324, Civ. C.). The buyer
bears the risk of the thing’s being lost or deteriorated from the date of taking delivery, and his
obligation to the seller remains unaffected by these circumstances. Stated a contrario, the risk
remains with the seller in so far delivery is not made appropriately and risk is not transferred.
Even though delivery might not yet have carried transfer of ownership, the rationale here is that
the law wants the risk of loss of the thing to be borne by the material possessor of the thing,
irrespective of the actual status of ownership rights.
The buyer bears risk not merely where he took delivery of the thing, but also from the day he is
late in taking delivery of the thing. Specific things are do not pose a problem here. If the sale
relates to fungible things, the delay of the buyer does not transfer risks because it requires
specifications and it is generally difficult to take delivery.
Things under voyage (on course of transport) may pose a problem in the determining the transfer
of risk. The idea here is that the risk of the voyage is for the buyer because the transfer of risks
happens on the day the thing leaves the hands of the seller, and it is immaterial that the thing is
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handed over to the buyer. But the law prohibits the seller from abusing his position by giving a
damaged thing and pretending the damage happened during the voyage. Fraud of the seller
reserves the risk to him, and if he knew or should have known that the thing had perished or was
damaged the risk will not be transferred to the buyer.
b) Expenses
A sale transaction could entail various expenses. Who is to bear these expenses is an important
question. The noticeable expenses here are those of forming the contract, delivery, transport,
payment, custom duties and expenses because of change in business address of a party.
The law provides that the expenses of delivery (that includes counting, measuring and weighing
costs), transport (where delivery is carriage-free), customs duties linked to a delay caused by the
seller, and those incurred due to the change in business address by the seller, are all borne by the
seller. The buyer on his part bears the expenses of the contract of sale itself, expenses for
payment, expenses after delivery and expenses of transport where thing is sent to other place than
that of delivery. The nature of these expenses and their appropriation shows that they are
incidental to the primary obligations and so borne by the respective parties.
c) Preservation of the Thing
The duty of preservation of the thing arises where the buyer fails to take delivery of the thing on
the one hand, and the seller makes a defective delivery refused by the buyer on the other. Where
the buyer is late in taking delivery or in paying the price, the seller bears the duty to preserve the
thing at the buyer’s expense. He is for that matter entitled to retain the thing until the buyer
indemnifies him of the expenses he incurred in preserving the thing. But if the thing deteriorates
or is damaged because of his failure to preserve, he will be liable. Where the thing sold has been
received by the buyer but he intends, legitimately, to refuse it, he is obliged to ensure its
preservation at the seller’s expense. He is again empowered to retain the thing until the seller
indemnifies him of his expenses of preservation. His failure to preserve the thing makes him
liable for the resulting damage or loss of the thing. Finally, the seller and the buyer can relieve
themselves of the duty of preservation by consigning or selling the thing in accordance with
general contract principles.
5.3. Non-performance of a Sale Contract
As sale is a special type of contract, and therefore the general rules of contracts will apply,
mutates mutandis. Thus, with some adjustments, the remedies of non-performance we have
tackled in the third chapter are applicable to non-performance of sale contracts. These are forced
performance, cancellation and damages, if any.
5.3.1. Forced Performance
Dear distance student, you have to recall your reading on forced/special performance of general
contracts. Specific performance is awarded only if it is of a special interest to the creditor and if it
can be carried out without affecting the personal liberty of the debtor. For example, if the buyer
finds the thing in the market, he cannot claim that the specific delivery of the thing by the
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defaulting seller is of a special interest to him. In this case, the buyer is preferred to make a
purchase in replacement if the new thing conforms to commercial practice or such purchase can
be effected without inconvenience or considerable expense. By the same token, a seller
cannot claim the forced payment of a price from the defaulting buyer if he can sell his thing at
equivalent price to someone else. That is, where compensatory sale is possible or customary, the
court will not award a forced performance against the buyer.
5.3.2. Cancellation
This is also not a novel nation as we have dealt with in relative depth on our discussion of
contracts in general. You are expected to recall all those points we put forth there and you can
make a simple adjustment to understand cancellation in a sale contract. As a rule, parties have to
seek cancellation of the contract from a judicial body. All the same, they can unilaterally declare
cancellation in exceptional circumstances. There are a couple of reasons attributable to the
buyer’s claim of cancellation and there are other sets of reasons for cancellation raised on the part
the seller. There are also reasons available to both parties.
i) Reasons for Cancellation by the Buyer
Cancellation is either judicial (by the court) or unilateral (by the buyer in this case). In both cases,
our focus is the buyer’s right to either ask the court or do it himself.
One reason is the expiry of the compulsory date fixed for delivery. The date is compulsory if the
thing has a market price on markets to which the seller can apply to obtain it. Where this time
lapses, the buyer can cancel the contract. Where the date fixed for delivery is not compulsory, the
court or the buyer may grant the seller an additional time called grace period within which he
shall perform his obligation. The contract is cancelled as of right where the seller fails to deliver
the thing within such additional time.
Another scenario that brings cancellation to the buyer is where whole ownership is not transferred
to him. That means the seller delivers thing in sale whose title is defective or encumbered because
of other persons’ rights over the thing. If the seller fails to deliver a thing free from all
encumbrances, the court can order the cancellation of the contract. However, no cancellation is
possible where the buyer knew of the encumbrance on purchasing the thing. The law disallows
cancellation in such case because parties knowingly entering into defective transaction should not
attempt to invoke that defect at the expense of creating insecurity in transactions. Again, there
will not be any cancellation where the right with which the thing is encumbered is of a small
importance and it appears that the buyer would have bought the thing despite the encumbrance.
The intention of the law is to prohibit immaterial defects featuring during contractual formation
from manipulations intended to avoid contractual obligations; these matters are to be objectively
appreciated by the court.
The encumbrance may be of the nature that the buyer is totally dispossessed from the thing he
bought. If the seller was bound to warrant the buyer against the dispossession, the contract is
cancelled as of right without any court involvement. The law, acknowledging that the buyer
bought the thing for enjoying it, regards total dispossession as defeating the whole object of the
sale transaction and therefore treats the contract as cancelled in its own right. In cases of partial
dispossession, it is the court that may decide on the cancellation. Cancellation is, however, not
possible where the dispossession only affects a part of the thing of minor importance and where it
is reasonably expected the buyer would have bought the thing had he even known of the potential
dispossession.
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A contract may also be cancelled (as invoked by the buyer) by the order or decision of the court if
the thing is affected by a defect against which the seller warranted the buyer. Note once again that
the thing is deemed to be defective where it does not possess the quality required for its normal
use or commercial exploitation or where it does not possess a quality required for its particular
use. Where the defect relates to part of the thing only, the contract is cancelled for that defective
part only. The contract may however be cancelled as a whole where the defective part cannot be
separated from the whole.
ii) Reasons for Cancellation by the Seller
The failure to pay the purchase price by the buyer constitutes one reason for the seller to invoke
cancellation of the contract. The seller may himself declare cancellation in case of non-payment
of price where such right has been given to him in the contract. If there is no express stipulation
in the contract that empowers the seller to cancel the contract upon non-payment as agreed, the
seller can declare cancellation only upon expiry of a reasonable time fixed by him in the default
notice made to the buyer. The seller can also cancel the contract where the buyer fails to pay the
price within the grace period given by the court.
The failure of the buyer to take delivery of the thing may somehow operate as a ground for the
seller to require judicial cancellation of the contract. If the buyer’s failure to take delivery justifies
the fear that he will not pay the price, seller can seek cancellation. This takes into account the
situation that some buyers manifest their refusal to pay the price by failing to take delivery of the
thing they purchased. Seller can also demand cancellation where taking delivery of the thing is an
essential stipulation of the contract and the buyer fails.
iii) Reasons for Cancellation by Both Parties
Both the seller and the buyer may get the contract cancelled due to certain conditions relevant to
their respective positions, the necessary changes being made. They are considered below.
One case involving defective performance (or non-performance) may pertain to successive
deliveries. In successive deliveries, performance does not stop at once; it continues for some time
in the future. In such case, the detective performance of the past may operate to stop future
performance. The law states that where, in contracts for successive deliveries by reason of the
non-performance or the defect of one of the performances due by a party, the other party is
justified in fearing that the future performance will not be made or will be affected by defects,
such party may require the cancellation of the contract for the future (Art 2351(1), Civ.C).
Normally the cancellation is for the future and the past performance, though not made or
defective, remains as it is. But where the plaintiff proves that the faulty delivery affects the whole
delivery by making such deliveries, past or future, useless to him, he may ask for cancellation of
the whole.
Impossibility in performance of an obligation entitles the respective party to cancel the contract.
Impossibility is a factual state of affairs, and occurrence of facts that make the performance of the
contract impossible evidently results in the cancellation of the contract. It is pointless for a
contract whose object has totally failed to remain in effect. Anticipatory breach is also a ground
for the cancellation of a sale contract. Anticipatory beach refers to the situation whereby one
party unequivocally (without any doubt) informs the other party that he will not perform the
obligation on his part. The other party can cancel the contract even if the breach is made before
the due date stated in the contract.
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iv) Effects of Cancellation
Where contract is cancelled for any of the above grounds, the parties are released from their
obligations under the contract. This release does not affect the right to demand damages where
they are sustained. Where a party has performed his obligation in whole or in part, he may claim
the restitution of what he had supplied including the expenses incurred. In the case where both
parties have performed their obligations, each of them may refuse restitution due by him until the
other party has effected his. Restitution is the return by a party of things he has taken under the
contract from the other party. If the seller is to refund the price, it must include interest from the
day of reception. If the buyer is to restore the thing to the seller, it includes profits derived from
the thing.
Sometimes restitution of the thing to its previous position may be impossible as a result of the
destruction of the thing in whole or in part or as a result of damage to the thing. If the loss or
damage is due to his act or due to the act of the person for whom he is responsible, the buyer
loses his right to claim to claim restitution; otherwise the buyer retains his right to cancel the
contract along with an award of damages. The buyer cannot, however, cancel the contact where
he is unable to restore the thing because he has assigned or transferred it or the thing has perished
or has been damaged by his act.
The person required to make the restitution of the thing shall be entitled to reimbursement of the
expenses he has incurred in preventing deterioration of the property or loss unless the expenses
were rendered necessary by his own fault or by the fault of a person for whom he is responsible.
Where the expenses incurred on the thing have increased its value, the person making the
restitution is entitled to the reimbursement of the expenses by the amount only of the increase in
value at the time of the restitution.
A person making the restitution of the thing may remove anything he joined to the thing which
can be separated from the thing without appreciable damage to the thing. Conversely, a person
required to make the restitution is bound to indemnify the true owner where the former has
caused deterioration of the property.
5.3.3. Damages as a Remedy for Non-performance
The non-performance by a contracting party of his obligation may be economically detrimental to

the other contractant, and the seller or the buyer, whoever the victim of the default might it be,
may claim that the damages thus caused be made good by way of compensation. Compensation is
claimed whether the contract is cancelled or maintained. It is also due where the contract has not
been regularly and exactly performed.
If the contract is sustained through specific performance, damages are due merely because of a
delay in performance so that the contracting party is awarded compensation for a time he is
deprived of the enjoyment of the thing that he had counted on. He may also have lost a good
chance to resell the thing if that was his intention. On the other hand, if the contract is cancelled,
the person is deprived of the advantage that he could legitimately expect from it. In both cases, it
is proper to reestablish the equilibrium established by the contract by remedying the upset by the
failure to perform the contract. This is done by requiring the person who has not performed his
obligation or has performed it improperly, incompletely or late, to pay damages to the other party.
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The principles of claiming damages we have raised on contracts in general are also applicable
here. Leaving that part for your reading, I briefly focus on the issues of damages specific to sale
contracts.
Where the contractual breach is only that of being late in paying the price, the amount of damages
to be awarded is that the buyer should pay interest at the legal rate. This means that if the contract
is performed anyway even though not in time, the damage is calculated to equal a simple interest
at the legal rate, i.e. 9% on the principal. A higher interest rate fixed for the contract as a whole
will not apply to the award of damages.
The amount of damages awarded where a contract is cancelled will be fixed having regard to
whether a thing has a current price. Current price refers to the price practiced on the market which
would be the normal place of business for the buyer or the seller. The amount of damages is equal
to the difference between the contractual price and the current price. The current price is the one
that prevails on the day when a party could exercise his right to declare unilateral cancellation or
on the day following the date of judicial declaration of cancellation. The defaulting party is also
to pay normal expenses linked to a purchase in replacement or compensatory sale as the case may
be.
The situation is treated differently in the eyes of the law where the thing does not have a current
price. Here there is no term of reference to objectively calculate the amount of the damages. One
therefore looks at the compensation a reasonable man (in this the court) deems appropriate. Such
amount may be increased to the actual prejudice where one party sustains damages because of
intent to harm, gross negligence or grave fault committed by the other party.
The amount of damages resulting from anticipatory breach is fixed by referring a current price of
the thing to that prevailing on the last day of the period stipulated in the contract for the
performance of the obligation. Where no time-limit for performance is fixed by the contract, the
day of reference is will be that when right to declare cancellation of the contract could be
exercised. Since anticipatory breach is usually made prior to the arrival of the contractually fixed
date of performance, the law implicitly upholds that it is fair to calculate the damage waiting for
the normal date of performance and the price in force on that day. Nevertheless, damages cannot
exceed the price actually paid for a previous purchase in replacement. Nor can it exceed the
difference between the price fixed in the contract and the price actually received for a previous
compensatory sale.
Finally, a scenario that could result in the award of damages is dispossession. In such case, the
seller should reimburse the buyer, in addition to any other damages, the judicial and extra-judicial
expenses of proceedings he had to institute. The exception here, i.e. where no damages may be
sought, is the expenses the buyer could have avoided had he informed the seller of proceedings
with third parties.
5.4. Some Issues About International Sale Transactions

Dear distance student, what we have so far been considering is almost entirely a domestic law of
sale. Law is very personal in the sense that it effectively applies in a jurisdiction of a state and not
somewhere outside. The Ethiopian sales law is given effect only in Ethiopia. Nevertheless, sale is
also an international affair transcending beyond the particular boundaries of a state because of
increased commercial and trade relations between states on the globe. So, in addition to particular
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treaties signed between countries regarding a transnational sale transaction, there are some
general issues we can arise.
Generally, the international sales contract is drafted to accommodate buyers and sellers with each
other. The bargaining systems cover items such as market forces affecting prices, risk factors and
terms that relate to security of payments. The final agreement is an essentially private transaction
and calls for a private legal regime.
Performance of an international contract involves greater distance and longer periods of time
before the goods are delivered and payment is required than in the usual domestic transaction.
There are also purely international risks such as differences in legal currencies, different
governmental regulations, difference in language, differences in legal system and society, etc.
The international sale of goods will commonly involve more than one legal relationship. That is
in addition to the basic sales agreement, there is a shipping contract and insurance contract.
Further, there is a variety of documents such as bill of lading, invoice, and marine insurance
policies. Trade problems associated with international sales contracts arise with regard to
restrictive trade devices that impede or distort trade. Classic examples include tariffs, import
quotas, import licensing procedures and complex customs procedures.
Even though many different issues are involved in international sale contract, here we are mainly
concerned with the arrangement related to security of payment in overseas trade. We thus focus
on the documentary credit, or letter of credit as it is usually called.
Because buyers and sellers engaging in international business transactions are sometimes
separated by thousands of miles, special precautions are often taken to ensure performance under
the contract. Sellers want to avoid delivering goods for which they might not be paid. Buyers
desire the assurance that sellers will not be paid until there is evidence that the goods have been
shipped. The exporting/importing Ethiopian enterprise does not trust its respective partner abroad.
Thus, letters of credit are frequently used to facilitate international business transactions. The
letter of credit is usually opened by a bank, and the bank serves as an intermediary and guarantees
the payment.
In a simple letter-of-credit transaction, the issuing bank agrees to issue a letter of credit and to
ascertain whether the beneficiary (seller) performs certain acts. In return, the account party
(buyer) promises to reimburse the issuer for the amount paid to the beneficiary. There may also
be an advising bank that transmits information, and a paying bank may be involved to expedite
payment under the letter of credit.
Under a letter of credit, the issuer is bound to pay the beneficiary (seller or exporter) when the
beneficiary has complied with the terms and conditions of the letter of credit. The beneficiary
looks to the issuer, not to the account party (buyer or importer), when it presents the documents
required by the letter of credit. Typically, the letter of credit will require that the beneficiary
deliver a bill of lading to prove that shipment has been made. Letters of credit assure beneficiaries
(sellers or exporters) of payment while at the same time assuring account parties (buyers or
importers) that payment will not be made until the beneficiary has complied with the terms and
conditions of the letter of credit. Study the following exhibit for a better understanding.
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ISSUER
BANK
SELLER LETTER OF
CREDIT BUYER
CARRIER
CHRONOLOGY OR EVENTS
1. Buyer contracts with issuer bank to issue a letter of credit; this sets forth the bank’s
obligation to pay on the letter of credit and the buyer’s obligation to pay the bank.
2. Letter of credit is sent to seller informing seller that upon compliance with the terms of
the letter of credit (such as presentment of bill of lading), the bank will issue a payment
for the goods.
3. Seller delivers goods to carrier and receives a bill of lading.
4. Seller delivers the bill of lading to issuer bank and, if the document is proper, receives
payment.
5. Issues bank delivers the bill of lading to the buyer
6. Buyer delivers the bill of lading to carrier.
7. Carrier delivers goods to buyer
8. Buyer settles with issuer bank.
The letter of credit is known for its virtue. The basic principle behind letters of credit is that
payment is made against the documents presented by the beneficiary and not against the facts that
the documents purport to reflect. Thus, in a letter credit transaction, the issuer does not scrutinize
the underlying contract; a letter of credit is independent of the underlying contract between the
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buyer and the seller. Eliminating the need for banks (issuers) to inquire into whether or not actual
conditions have been satisfied greatly reduces the costs of letter of credit. Moreover, the use of a
letter of credit protects both buyers and sellers.
The compliance with a letter of credit is usually simple to assure. In a letter of credit transaction,
generally at least three separate and distinct contracts are involved: the contract between the
account party (buyer) and the beneficiary (seller), the contract between the issuer (bank) and the
account party (buyer), and finally the letter of credit itself, which involves the issue (bank) and
the beneficiary (seller). As noted, given that these contracts are separate and distinct, the issuer’s
obligations under the letter of credit do not concern the underlying contract between the buyer
and the seller. Rather, it is the issuer’s duty to ascertain whether the documents presented by the
beneficiary (seller) comply with the terms of the letter of credit. If the documents presented by
the beneficiary (seller) comply with the terms of the letter of credit, the issuer (bank) must honor
the letter of credit.
Sometimes, however, it is difficult to determine exactly what a letter of credit requires. The
degree of compliance required of parties by a letter of credit may vary slightly form place to
place. The Commercial Code of Ethiopia contains provisions on letter of credit (Art.959-967). It
recognizes two types of letters of credit: revocable and irrevocable. Revocable credits are not
legally binding undertakings between banks and beneficiaries. Such credits may be modified or
cancelled at any time without any notice to the beneficiary. When the revocable letter of credit
had been transmitted to a branch or another bank, the fact of modification or cancellation of such
credit must be communicated to the branch or other bank prior to payment, negotiation or
acceptance of the credit. Otherwise, the cancellation or modification cannot have effect on the
conduct of the branches or the other bank. Revocable credit is to the disadvantage of the seller
(exporter) as he may not have recourse against issuer. Therefore, he does not seem to consent to
such a credit.
Irrevocable credit is, on the other hand, a definite undertaking by an issuing bank and is binding.
Irrevocable letter of credit, as the name indicates, cannot be modified or cancelled, and it would
constitute the full engagement of the issuer (bank) to the beneficiary or other bona fide holders of
drafts drawn under the letter that the provisions for payment, acceptance or negotiation contained
in the letter of credit will be duly fulfilled. Thus, irrevocable letter of credit embodies a firm
commitment by the issuing bank and its issuance imposes on the issuer (bank) an obligation from
which it cannot withdraw.
Irrevocable letters of credit require confirmation to bind other bank. When the issuer instructs
another bank to confirm its irrevocable letter of credit and when the latter does so, the
confirmation implies a definite undertaking of the confirming (advising) bank as from the date on
which it gives confirmation. In an unconfirmed letter of credit, the beneficiary will not have
recourse against the advising bank. In the case of a confirmed irrevocable credit, the beneficiary
has double promise for payment by two banks and he can quite legitimately enforce his claims of
payment not only against the issuing bank but also the confirming bank.
The advising bank is, juristically speaking, jointly and severally liable after its confirmation is
secured. After the shipment of goods, the documents are presented by the seller to the advising
(confirming) bank. If the documents comply with the specification in the letter of credit, the
advising bank can even immediately pay the seller and demand payment of the goods from the
issuing bank. On the other hand, the buyer is the customer of the issuer (bank); he has no
contractual relationship with the confirming (advising) bank. Consequently, the buyer would have
no rights against the advising bank and vice versa.
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Self- check Exercises

1. If the sale contract is silent as to the place and time of delivery, where and when should
delivery take place?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
___________________________________________________________.
2. If you go to a bank and exchange 100 USD for Ethiopian Birr, does that constitute sale?
Why or why not?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
____________________________________________________________.
3. State special matters, if any, that pertain to cancellation of a sale contract as opposed to
cancellation of contracts in general.
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________.
4. Explain patent and latent defects and their respective effects.
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
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________________________________________________________________________
________________________________________________________________________
__________________________________________________________.
5. What does the duty to transfer “unassailable rights” refer to?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
____________________________________________________________.
6. There are cases where warranty for defects cannot be contractually excluded. Identify.
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
____________________________________________________________.
7. There are cases where contractual silence regarding warranty for defects legally excludes
the warranty. Identify.
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
_______________________________________________________.
8. How do you distinguish contract of supplies from a sale contract?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
___________________________________________________________________.
9. What is the remedy available to the buyer is case he faces dispossession from the thing?
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________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
__________________________________________________________________.
10. What is non-conformity?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
_______________________________________________________________.
11. A purchased a mobile cell from B, a dealer. There were many defects in the cell which
rendered it unfit for use. A sued B for breach of warranty. B raised the defense that the
defects were latent and unknown to him and could not have reasonably been discovered.
Could B avoid liability on the said ground?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
_____________________________________________________________.
12. X contracted to sell 70 head of beef cattle of Birr 150 per hundredweight to Y.Y made a
Birr 5000 down payment. Before delivery, X heard a rumor that Y was in poor financial
condition, and X demanded that he receive full payment before delivering the animals. Y
told X that the balance would be paid on delivery, based on the weight of the cattle
delivered. X refused to deliver the cattle and sold them to a third party. Y filed a suit. X
claimed that Y’s refusal to pay was an anticipatory breach of the contract. Discuss
whether X was correct and what action he could have taken on the basis of the rumor?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
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________________________________________________________________________
_________________________________________________________________.
13. A bank issued a letter of credit in favor of A to cover the sale of 100,000 computers. The
letter of credit specified that the computers would be transported by ship. A shipped the
computers by air. Payment on the letter of credit was dishonored because the shipment by
air did not fulfill the precise terms of the letter of credit. Should a court compel payment?
Explain.
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
__________________________________________________________________.
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CHAPTER SIX
INTRODUCTION TO COMMERCIAL LAW
Commercial law is a broad area of law. Our concern here is only with the fundamental principles
as particularly enshrined in the Commercial Code of Ethiopia. You will have a brief look at the
law of traders and business organizations, insurance and negotiable instruments. At the end of this
chapter, you must be able to:
- distinguish traders from non-traders.
- differentiate the business organizations that can be formed in Ethiopia,
- define insurance and insurable interest
- state the significance of insurance transactions
- describe negotiable instrument and negotiability
- identify the different types of negotiable instruments and their resenting features.
6.1. Law of Traders and Business Organizations

6.1.1. Traders
Who are traders? This is the foremost question that may come to one’s mind. Traders are persons
who carry on trading activities professionally and for gain. Their professional career is indicative
of the fact that these persons engage in trade as a means of earning livelihood. Obviously, traders
pursue profit-making ends. The law has expressly stated in a seemingly limitative list, the
activities that are regarded as trading. Article 5 of the Ethiopian Commercial Code contains
twenty-one activities in which traders can engage in.
Thus, not all persons who operate a given task for profit may be necessarily regarded as traders.
For example, persons who engage in agricultural production, cattle breading, fishery and persons
who operate activities at the level of handcrafts are not treated as traders even if they derive
profits out of their activities, and they don’t have the rights and duties of traders. This shows that
the type of activity, not necessarily a profit generating one, is considered for categorizing a
professional pursuer as a trader or not.
There are some persons who from the outset cannot engage in trading activities or at least engage
subject to fulfillment of certain conditions, not because the activities they engage in are non-
trading. Incapable persons, foreigners, associations, among others, are group of persons who
cannot engage in commercial activities. Incapable human beings such as minors and persons with
interdiction are denied the capacity to carry out acts of civil life, and trade is at the top of juridical
acts. Therefore, persons with incapacity cannot operate trade personally by the application of the
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law of physical personality. Foreigners on their part cannot directly go into trade matters as
nationals. First, there are activities reserved to nationals, and foreigners are totally enjoined from
participating in those sectors. Secondly, they need to secure work permit before embarking upon
trading ventures. However, for a poor nation like ours, foreign investment is necessary and the
government’s successive grant of investment permit to foreigner’s evidence to this fact.
Associations, on the other hand, are organizations formed to operate non-profit making activities.
Religious, social or many other non-governmental organizations acquire legal personality upon
registration but are not traders, for the mere reason that they pursue end other than the realization
of commercial surpluses.
A trader can be both a physical person and a juridical person. Both human beings and corporate
entities are regarded as traders when they take part in the activities earmarked by the law as
trading ones. Thus, a trader is not to merely mean individual merchants, and the corporate form of
trading is also legitimately recognized.
Traders have certain obligations not borne by non-trading persons. They are generally required to
be registered, to obtain business license and to keep books and accounts. No trader can engage in
commercial activities unless first registered in the commercial register. The government tries to
avoid the huge potential abuse in this sensitive area by overseeing the potential and actual
conduct of the traders by, among other things, requiring registration. A similar end may be served
by requiring the trader to secure a business license form the authorities. A crucial obligation,
especially from the view point of government revenue, is the maintenance of proper and accurate
books of account. Business sector is the principal area from which the government generates
revenue through taxation to operate its multiple functions. Computations of tax liability are by
and large dependent accurate financial records by the concerned trader.
6.1.2. Law of Business Organizations
Among the two basic forms of doing business, i.e. individually or through an incorporated body,
the latter form can be split into various sub-forms. The corporate form of doing business we deal
with right now is the private one, meaning business forms taken up by non-state entrepreneurs
and that are governed by the commercial law. A corporate form of business undertaking is also
available to the public in a slightly different form from the private counterpart. Public enterprises
and cooperatives are the public forms of engaging in commerce by way of a corporate body.
Anyway, one scheme of operating business may be chosen over another for a variety of reasons.
Business organization is defined under the Commercial Code as an association arising out of a
partnership agreement. The word “association” is not used here to equate business organizations
to non-profit making entities; it is used here to mean grouping of people. A business organization
is, therefore, a grouping of business persons that comes out of the partnership agreement. A
partnership agreement exhibits certain features and contains certain elements. According to article
211 of the Commercial Code, it is defined as a contract whereby two or more persons who intend
to join together and to cooperate undertake to bring together contributions for the purpose of
carrying out activities of an economic nature and of participating in the profits and losses arising
out thereof, if any. Let’s try to dissect the statement in order to understand a partnership
agreement.
The partnership agreement is a contract in the strict sense of the term. As a contract, multilateral
instrument, it should satisfy all the legal requisites we raised on general principles of contract law
and it produces all the effects of a contract. It binds together the cooperators and contributors and
it is backed by the sanction of law for enforcement. As a contract again, two or more persons are
needed and this means that a single person cannot establish a business organization in Ethiopia.
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Parties to the partnership agreement should be willing to work together for common goal. The
extent of collaboration depends on the nature of the business organization. In companies,
personality of the contractants is less important than that in partnerships. The persons also
undertake to make contributions that later constitute the business organization. The kind of
contribution may depend upon the interest of the parties and the need for investment in the
business organization. Cash contributions are the obvious modes. But in kind contributions, or
even skill (knowledge), are possible in so far as they are susceptible to monetary valuation.
Business organizations are established for the purpose of carrying out activities of economic
nature and the partnership agreement should also reveal this. That is to say, persons organize
them selves in the form we are talking about to strengthen their economic power, to collect more
profit. In other words, a business organization cannot be established for purpose other than profit
making. The contracting parties further undertake to participate in both the profit and the loss that
arise out of their operation, as the case may be. The contract cannot exclude members from either
the profit or loss or both. Mind you here that the case of limited liability is conceptually different
and it is generally recognized in companies.
The Ethiopian law recognizes six types of business organizations: three types of partnerships, two
types of companies and a joint venture. Partnerships are associations of persons and the
personality of members does greatly matter. Companies are associations of capital and the
personality traits of shareholders are not important to the existence of the company. Joint ventures
are unique forms of business organization. Let’s have a cursory look at them.
a) Partnerships
Partnerships would have their own legal personality upon registration and publicity. But such
personality is greatly dependent on the mutual understanding between the partners so much so
that the withdrawal of one partner may cause the dissolution of the partnership as a whole. There
are three types of partnerships: ordinary, general and limited partnerships.
Ordinary partnerships are corporate forms of doing business in non-commercial activities. A

commercial business organization is the one that picks up one of the activities listed under Article
5 of the Commercial Code. A business engaging in those activities cannot be run in the form of
ordinary partnerships. An ordinary partnership may be set up to operate other activities that do
not make their doer a trader. Most of the provisions of ordinary partnerships are informal and
flexible, compared to the provisions governing general and limited partnerships. Partners in an
ordinary partnership are, however, all jointly and severally liable for the debts of the partnership.
But partners may avoid the joint and several liability by contractually stipulating to the contrary.
General partnership is a commercial business organization in which all partners occupy the same
position vis-à-vis third parties. All partners are jointly and severally liable to third parties, and
they cannot even avoid this obligation by a contractual term. All of the partners can be managers
of the partnership. Creditors will have recourse against the partners only after they exhaust the
possibilities of recovery from the partnership.
A limited partnership comprises two categories of partners: general partners and limited partners.
The general partners of a limited partnership assume similar obligation as that of partners of a
general partnership. General partners are jointly and severally liable for the debts and
commitments of the partnership where the assets of the partnership cannot cover the debts and
commitments. This group of partners act as managers of the limited partnership. Limited partners,
on the other hand, are partners that cannot be held responsible for the debts of the partnership
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beyond their original contribution. They cannot also take part in the management for that is
inconsistent with their exemption from liability.
b) Companies
The company is the best way of doing business in a corporate form. it is characterized by an
acquisition of capital from a relatively wider segment of the society. What is needed is capital and
not persons, and thus members are not expected to take part in the operations of the company.
Ownership belongs to dispersed shareholders while management and control is in the hands of
professional managers. The basic virtue of the company form is the full recognition of limited
liability. No contributor (shareholder) is held liable for the debts of the company beyond his
contribution, and he does not risk losing his personal property because of liability incurred by the
company. The life of a company is not dependent on the life of the shareholders, unlike
partnerships. The company exists and operates independently of, and in fact remotely from,
shareholders and the company continues despite withdrawal or death of shareholders.
We have two types of companies: share companies and private limited companies. Both have
their partnership agreement expressed in what are termed as memorandum of association and
articles of association. They also have their capital divided into shares, and they issue shares,
even though shares of a very different nature. They are always commercial business organizations
in the sense that they engage only in one of the activities legally recognized trading ones. They
also have differences.
The minimum capital requirement is significantly different. A private limited company has
capital ceiling but share company can raise capital to an unlimited amount. The number of
shareholders for a share company is minimum five while private limited companies can be
formed by fewer people up to two. But the latter have a ceiling on the number of shareholders,
20, while there is no limitation on the maximum number of shareholders in share companies.
Share companies are authorized to raise capital through a subscription of shares to the public and
pool together large sums of money for the capital of the company. Private limited companies
cannot offer shares for public subscription.
Share companies can issue transferable shares and other transferable securities. They can issue
various classes of shares that can be negotiated easily. They can enter into loans by issuing
debentures. Private limited companies cannot issue such documents. In share companies,
important decisions are made by the general meeting of share holders. But in private limited
companies, the possibility or importance of such meeting is doubtful as the line between
ownership and management is often blurred.
c) Joint Ventures
Joint ventures in investment law parlance refer to the collaboration between two persons (usually
where the government is a party) already in another business. Under the Ethiopian Commercial
Code, a joint venture is a secret business organization. The existence of a joint venture cannot be
disclosed to third parties. The organization is known only to the venturers. The agreement
forming a joint venture need not be made in writing. A joint venture need not be registered and
publicized by any way. Accordingly, a joint venture cannot be a person; it cannot sue and cannot
be sued. Third parties only know the manager of the joint venture. The manager is responsible for
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all faults and liabilities that may emerge because of the business. The powers of the manger and
liability of other partners will be determined in their internal mutual agreement.
6.2. Law of Insurance

6.2.1. General
Insurance is a social security scheme that developed because of the existence of risks. Risks are
evident especially in the business world where persons may be exposed to huge losses as a result
of the materialization of the risk. Such a phenomenon may discourage people from venturing on
sectors that may entail risk or the business sector might have been generally endangered.
Insurance policy had succeeded in responding to the abovementioned problem.
A person or an organization may merely assume a risk of some kind that may or may not happen.
Whether the risk happens or not is, however, not certain. No body knows when, how and to what
extent the risk may materialize. If this fact was known beforehand, every one would have avoided
it. It the uncertainty and fear of unfortunate moment may hamper commerce or industry. The
uncertainty surrounding potential losses is referred to as risk. An insurance coverage for the risk
will encourage people to conduct business with out the fear of the occurrence of the risk. There
are many virtues of insurance.
Insurance makes a person work with out fear and thus increase production and productivity.
Individuals perform more in a risk free or risk controlled environment. Insurance helps to budget
money for unknown loss. If a person is insured, he pays money to the insurance company at a
continuous interval. The periodic payment, called premium, can be taken as a budgeting in
advance for an uncertain risk.
Most importantly, insurance distributes risk among different people. People under a certain risk
make payments in advance so as to address the risk in case it materializes. The public will make a
cumulatively huge contribution to the insurer, and the insured who suffered the actualized risk
would be redressed and put to his position he was before the materialization of the risk. Because
the insured has got paid from the fund pooled together by the public and we can say that the risk
is dispersed on the people generally. The distributed burden would be too easy for members of
the community to bear, but would have been very devastating on the individual persons in the
absence of insurance.
Insurance has become a significant force in the industrial sector where there is an active
movement of labor and where equally risk exists. Insurance protects workers against work related
hazards. While the workers enjoy work with out fear, that will be very beneficial to the employer
for more work is to be performed and production increased. The gigantic insurance companies
create employment opportunity. Their financial and social status makes them great contributors to
the employment sector of a nation.
6.2.2. Insurable Interest
Any party purchasing insurance must have a “sufficient interest” in the insured item to obtain a
valid policy. Insurance laws determine sufficiency of items for insurance coverage. A person is
said to have insurable interest where he has a vested interest in the subject matter of insurance to
93
whom the advantage may arise or prejudice may happen. There must be an economic link to the
claim of insurance.
A person should have some kind of relation to or concern in the subject matter of the insurance.
Insurance protects the relation or economic concern on a thing. We say that there is an insurable
interest if the occurrence of a given peril assumed to affect the concern on the subject matter of
insurance proved to affect the economic interest of an insured. The insured should be benefited
from the existence of a thing or an interest insured or should be prejudiced by its destruction upon
materialization of the risk.
6.2.3. Insurance Policy and Rights and Duties of Parties
Insurance policy is basically a contract, but a special contract. It is defined under Article 654(1)
the of the Commercial Code as a contract whereby a person called the insurer, undertakes against
payment of one or more premiums to pay to a person, called the beneficiary, a sum of money
where a specified risk materializes. As a contract, an insurance policy should satisfy all essential
requirements of a valid contract. In addition, it must exhibit the special features attached to it by
the provisions of the Ethiopian Commercial Code.
Accordingly a contract of insurance must be made in writing. This is so because the law says that
the contract should be supported by a written document called an insurance policy, which, as is
mentioned in the definition is the contract itself (Art 657 (21). We can say that the law has
specifically imposed a writing requirement in the creation of an insurance contract, and that must
be observed. The insurance policy also is to contain the facts stated in Article 658. These are:
- the place and date of the contract;
- the names and addresses of the parties;
- the items, liability or person insured;
- the nature of the risks insured;
- the amount of the guarantee;
- the amount of the premium; and
- the term for which the contract is made.
In insurance contracts, the person guaranteeing against a given risk is called the insurer. In
Ethiopia, only share companies can be insurers because financial activities, viz banking and
insurance, are run only in the form of share companies. The person seeking an assurance against a
definite risk is the insured, or the beneficiary to use the Code’s terminology. The insured may
subscribe insurance policy for his own benefit or for the benefit of other person(s), i.e. the
beneficiary of the policy may be the insured or a third party.
The insurance policy must specify the subject matter of the insurance that contains an insurable
interest. Insurable subject matter could be a property exposed to peril (such as car, building,
machinery), liability to third parties, persons themselves including their life and illness or
accidents.
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The insurance of property refers to both corporeals and intangibles. Physical assets are obviously
proper subject matters for insurance policy. Equally, intangible claims such as rights and credits
(receivables) to be collected may be insured. Even though these do not have a material existence,
there is a risk that they may not be recovered or received and thus they constitute insurable
interest. A person may face a liability to third parties. He may extra-contractually fall into a
liability scenario and this is a risk. A person can cover such risk with an insurance policy so that
he normally undertakes his activities with out much fear of liability.
Another subject matters of insurance are persons. Persons insure themselves for a variety of
reasons. For example, a person’s death may seriously affect his descendant’s or others whom he
supports. Life insurance policy provides such person to give financial security in advance to
persons he supports. The life of the insured is an insurable interest for ultimate beneficiaries
whose livelihood is dependent on the earnings of the insured. Likewise, a person may insure
himself against defined accidents or illnesses for his own benefit or for the benefit of others. An
accident may cause a serious and permanent bodily injury and may thus reduce the working and
earning potentials. Illness may cause same. Insurance is a good security for such risks. The
insurance of illnesses or/and accidents usually includes their consequences including death.
The insurance policy contains certain basic rights and obligations from which parties can not even
contractually derogate. Both the insurer and the insured do bear some duties to one another. The
insurer guarantees the insured against the risks specified in the policy, and he must pay the agreed
amount within the time specified in the policy or when the risk insured against occurs at the time
specified in the policy. This duty of the insurer is not affected even if the losses or damages
insured occurred due to the fault of a person for whom the insured is responsible, and the
obligation remains valid regardless of establishing such link. But the insurer is automatically
exempted from the duty if the losses or damages covered by the policy are caused by the
negligent or intentional fault of the insured himself.
The main duties of the insured under an insurance policy are the payment of a fixed premium and
the disclosure of material facts. Insurance is not a gratuitous contract; it is a contract made for
consideration and each of the parties performs obligations. Thus, the insured pays a fixed sum,
called premium, which is usually paid on a time interval. The insured is equally obliged to
disclose exactly all the material facts within his knowledge. This is an essence of an insurance
policy and no contract continues without making exact statements of all the facts. By material
facts, we mean that the insurer appreciates the risks based on them and consents to enter into the
policy based on that. Thus, any concealment or false statement made by the insured that make the
insurer wrongly appreciate risks, and that lead the latter to enter into the policy which otherwise
he would not have done, would nullify the policy.
6.3. Some Remarks about Law of Negotiable Instruments

A negotiable instrument is any document incorporating a right to an entitlement in such a manner
that it be not possible to enforce or to transfer a right separately from the instrument (Art.715 (1),
Comm.C). A negotiable instrument is a special but simple document that gives the possessor a
right to the entitlement as expressed in the instrument by the presentment of the instrument to the
debtor. The right cannot be claimed without the delivery of the instrument. The instrument is said
to be negotiable because it can be transferred (with the full rights) from one person to the other by
mere delivery or, some times, by endorsement.
95
The Ethiopian law recognizes three categories of negotiable instruments: commercial

instruments, transferable securities, and documents of title to goods. Transferable securities are
mechanisms of holding and negotiating certain types of rights and such include shares and
debentures. Documents of title to goods represent right over goods that are on shipment. A bill of
lading, a truckway bill and an airway bill are the examples.
Commercial instruments are the most noticeable types of negotiable instruments. They are
documents that embody an entitlement to a specific sum of money. We will have some issues
regarding these categories of negotiable instruments below.
The vast number of commercial transactions that take place daily in the modern business world
would be inconceivable without commercial paper (instruments). Commercial paper is any
written promise or order to pay a sum of money. Bills of exchange (drafts), promissory notes and
cheques are typical examples. Commercial paper is transferred more readily than ordinary
contract rights, and persons who acquire it are normally subject to less risk than the ordinary
assignee of a contract right. Commercial paper at the beginning grew out of commercial
necessity, and was used in accordance with practices set by individual merchants. But later on, it
gained attention from the legal system and its importance has resulted in the emergence and
development of separate legal regime.
Instruments function in two ways – as a substitute for money and as a credit device. Debtors
sometimes use currency, but for convenience and safety they often use instruments instead. For
example, an instrument is being used when a debt is paid by cheque. The substitute-for-money
function of instruments developed in the middle ages. Merchants deposited their precious metals
with goldsmiths to avoid the dangers of loss or theft. When they needed funds to pay for the
goods they where buying, they gave the seller a written order addressed to the goldsmith. This
authorized the goldsmith to deliver part (or all) of the precious metals to the seller. These orders,
called bills of exchange, were sometimes used as a substitute for money. Today, people use
cheques and other types of instruments in the same way.
Instruments may represent an extension of credit. When a buyer gives a seller a promissory note,
the terms of which provide that it is payable within sixty days, the seller has essentially extended
sixty days of credit to the buyer. The credit aspect of instruments was developed in the Middle
Ages soon after bills of exchange began to be used as substitutes for money. Merchant buyers
were able to give to sellers bills of exchange that were not payable until future date. Because the
seller would wait until maturity date to collect, this was a form of extending credit to the buyer.
For an instrument to operate practically as either a substitute for money, credit device, or both, it
is essential that the paper be easily transferable without danger of being uncollectible. This is the
function that characterizes negotiable instruments.
The Ethiopian Commercial Code specifies four types commercial instruments: bills of exchange
(drafts), cheques, promissory notes and traveler’s cheques. The instruments are frequently divided
into two: orders to pay (drafts and cheques) and promises to pay (promissory notes). The
instruments may also have different natures based on the form of transfer. They may be specified,
to bearer or to order documents.
Instrument which is payable to bearer may be transferred by delivery alone; the bearer simply
hands to another party. The holder of an instrument in a specified name establishes his right, upon
delivery, to the entitlement as expressed in the instrument by his designation as beneficiary
therein and in the register held by the person issuing the said instrument. Instruments to order
96
may be transferred by endorsement and delivery of the instrument to the beneficiary under the
transfer.
A draft (bill of exchange) is an unconditional written order that involves three parties. The party
creating it, the drawer, orders another party, the drawee, to pay money usually to a third party,
the payee. The drawee must be obligated to the drawer either by agreement or through a debtor-
creditor relationship for the drawee to be obligated to the drawer to honor the order. A cheque is
simply a bill of exchange drawn on a banker. In the case of cheque, the drawee is a banker. It is
also an instrument to order.
The promissory note is a written promise between two parties. One party is the maker of the
promise to pay and the other is the payee, or the one to whom the promise is made. A promissory
note, which is often referred to as a note, can be made payable at a definite time or on demand. It
can name a specific payee or merely be payable to bearer.
The requirements for negotiability of these instruments are: be in writing, signed by the maker or
the drawer, be an unconditional promise or order to pay, state a fixed sum of money, be payable
at sight (on demand) or at a fixed date. They are payable to order or to bearer, unless it is cheque
which is always to order.
Unconditionality of promise or order: - A negotiable instrument’s utility as a substitute for

money or a credit device would be dramatically reduced if it had conditional promises attached to
it. It would be expensive and time-consuming to investigate conditional promises or orders, and
therefore the transferability of the instrument would be greatly restricted. Substantial
administrative costs also would be required to process conditional promises. Furthermore, the
payer or any holder of the instrument would risk the possibility that the condition would not
occur.
A fixed amount of money: - Negotiable instruments must state with certainty a fixed amount of
money to be paid at any time the instrument is payable, a requirement that promises clarity and
certainty in determining the value of the instrument. Any promise to pay an amount to be
determined in the future in risky, because the value of money (purchasing power) fluctuates.
Also, if the instrument’s value were stated in terms of goods or services, it would be too difficult
to ascertain the market value of those goods and services at the time the instrument was to be
paid.
Promise or order: - For an instrument to be negotiable, it must contain an express order or

promise to pay. A mere acknowledgement of the debt, which might logically imply a promise, is
not sufficient because the promise must be affirmative, written undertaking. But, if such words as
“to be paid on demand” or “due on demand” are added, the need for affirmative promise is
satisfied.
The transfer of entitlements a negotiable instrument embodies are transferred by negotiation.

Negotiation is the transfer of an instrument in such form that the transferee (the person to whom
the document is transferred) becomes a holder. A transfer by negotiation creates a holder who, at
the very least, receives the rights of the previous possessor. A transfer by negotiation, unlike an
assignment, can make it possible for a holder to receive more rights in the instrument than the
prior possessor had. A holder who receives greater rights is known as a holder in due course.
Such holder acquires that privileged status on the instrument because of his good faith possession.
There are two methods of negotiating an instrument so that the receiver becomes a holder: it
depends on whether the instrument is to order or to bearer.
97
If an instrument is payable to bearer, it is negotiated by delivery – by transfer into another

person’s possession. The use of bearer paper involves more risk through loss or theft than the use
of order paper because any one in possession, irrespective of the manner of acquisition of the
instrument, is entitled to the sum the instrument represents.
Order paper contains the name of a payee capable of endorsing. If an instrument is payable to
order, it is negotiated by delivery with any necessary endorsements. An endorsement is a
signature with or without additional words or statements. It is most often written on the back of
the instrument itself. If there is no space on the instrument, endorsements can be written on a
separate piece of paper called allogne. The allogne must be fixed to the instrument to become a
part of the instrument.
98
Self-check Questions
1. How would you distinguish traders from ordinary persons?

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________.
2. The Ethiopian Commercial Code, which is still in force, contains an exhaustive list of
trading activities. But many ways of doing business have emerged since its promulgation.
Do you think these ‘new’ ways of doing business cannot do not have a law in force for
their regulation? Explain.
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
______________________________________________________________.
3. Financial business in Ethiopia is not only reserved to nationals but also can only be
undertaken in the form of share company. Why such a restriction?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
______________________________________________________________.
4. “Private limited companies in Ethiopia have the combined virtues of privacy of

partnerships and permanence of share companies”. Explain.
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
___________________________________________________________.
99
5. Joint ventures are secret profit-making institutions so much so that they do not have legal
personality. What purpose does the law contemplate when it recognizes such form of
business organizations?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________.
6. Insurance is an indispensable social service sector. Discuss the rationale behind the
emergence of an insurance scheme.
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
_____________________________________________________________.
7. What requirements must be met for an instrument to be negotiable?

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
_______________________________________________.
8. A note has two original parties. Who are they? A cheque has three original parties. Who
are they?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
___________________________.
9. What are the differences between instruments to bearer and to order?

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________.
100
10. The following note is written by Admassu Kibebew on the back of an envelope: “I,
Admassu Kibebew, promise to pay Maeregu Tesfaye or bearer Birr 1000 on demand.’ Is
this a negotiable instrument? Discuss fully.
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
_______________________________________________________________.
101

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Business Law Oda Bultum University school of law.

INTRODUCTION TO LAW AND THE LEGAL ENVIRONMENT OF BUSINESS

- Specifically internalizing the functions law performs in a society and those of

- Identifying the important legal matters in business interactions,

1.1. Meaning of Law and Schools of Jurisprudential Thought

a) The Natural Law School

b) The Positivist School

d) The Marxist Legal Thinking

1.2. The Features of Law

iii) Establishment in Permanence

iv) Intimacy with Human Behavior and State

1.3. Law as Distinguished from Other Social Norms

1.4. Functions of Law

1.5. Classifications of Laws and Nature of Business Law

Public versus Private Law

Substantive and Procedural Law

Civil versus Criminal Law

1.6. Out-of-Court Settlement and its Virtues in Business

1.6.1. Negotiation, Conciliation and Mediation

Conciliation is a mechanism of dispute resolution in a friendly and unantagonistic manner in

3. What specific functions does business law perform in the society?

2.1. The Concept of Personality and its Effect

Personality is a fundamental concept in law because no dealings of legal significance would

2. 2. Beginning and Termination of Artificial Personality

2.3. Attributes of Legal Personality

2.4. Commencement of Physical Personality

2.4.1. The Rule

2.4.2. The Exception

The granting of personality to a fetus is subject to compliance with three cumulative

2.5. Capacity and Incapacity of Physical Persons

d) Foreign Nationality: - This is a special incapacity because a person is prevented from

2.6. Termination of Physical Personality

Declaration of absence can, through interpretation, also result in termination of physical

Review and Self-check Questions

1. Why is the knowledge of law of personality so important to a businessman or a

3. What is the effect of a civil act performed by a judicially interdicted person?

5. Work out the following case by making correct reasoning:

THE LAW OF CONTRACTS

- Discovering the nature of a civil obligation;

3.1. Some Remarks on Obligations

3.2. Essential Notions of Contracts

D) The object of contracts is the establishment and performance of an obligation – an

G) There are conspicuously abundant types of contracts in economic interactions of persons:

parties undertakes an obligation towards the other party (e.g. contract of

3.3. Formation of a Contract

Consent is a defect-free mutual agreement by the contracting parties. It is a manifestation of

3.3.2.1. Offer and Acceptance

In preliminary negotiations, a request or invitation to negotiate is not an offer. It only expresses a

i) Termination by the Action of the Parties

Revocation practically operates as a mechanism of terminating offers especially where

ii) Termination by Operation of Law

Acceptance must be communicated, and, conversely, uncommunicated acceptance is no

3.3.2.2. Vices of Consent

A mistake is ordinarily understood as an erroneous belief in the truth of a situation or in the

I) Mistake as to the Nature or Object of the Contract

II) Mistake as to the Person

A claim of mistake to invalidate a contract is subject to the requirement of good faith. A